Avoid a hefty IRS tax bill next year with these Inherited IRA rules.
Tax Rules for Inherited Individual Retirement Accounts
Understanding the tax rules for inherited individual retirement accounts (IRAs) can be a complex task, especially with the introduction of new regulations. If you have inherited an IRA after January 1, 2020, from someone who has passed away, it’s important to be aware of the changes that may affect you.
Noneligible Designated Beneficiaries
Nonspouse beneficiaries who inherited an IRA after January 1, 2020, fall under the category of noneligible designated beneficiaries. According to the new regulations, these individuals must empty their inherited IRA within a period of 10 years. However, it’s worth noting that these changes do not apply to those who inherited IRAs from individuals who passed away before 2020 or to spouses, who are known as eligible designated beneficiaries.
Options for Heirs
Under the Secure Act of 2019, heirs have two options when it comes to handling the inherited IRA. They can choose to take out the money as a lump sum and pay taxes on it, or they can transfer the funds into a new account, either in an IRA or a qualified employer plan.
Required Minimum Distributions
Heirs will be required to take a required minimum distribution (RMD) the year after the original IRA owner’s death. However, it’s important to note that RMDs from inherited IRAs were temporarily suspended in 2021 and 2022. While they were expected to resume this year, the IRS has extended the final ruling on changes to inherited IRA required distributions until 2024. This means that in 2023, those who inherited IRAs may be subject to a 25% excess accumulation penalty tax for late payments.
Important Deadlines
RMDs can be posted until the year in which the original IRA owner would have turned 73 years old or until December 31 of the year following the year of death.
The IRS initially issued proposed guidance in 2022 and expects to have the new updates finalized by 2024.
For more information on this topic, you can click here to read more from The Washington Examiner.
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