Raleigh NC Financial Advisor: IRS Delays IRA RMDs
The IRS has made a new tax relief measure for taxpayers dealing with complex rules about required minimum distributions. Here's the essential information you should be aware of regarding the latest modification pertaining to RMDs for inherited IRAs.
IRS Delays Withdrawal Rules
In recent years, there have been significant changes in retirement plan rules due to various legislation. For instance, the SECURE Act of 2019 brought about a notable alteration for most beneficiaries of inherited IRAs. Instead of being able to "stretch" distributions over their lifetimes, non-spouse beneficiaries who inherited IRAs on or after Jan. 1, 2020, are now required to deplete the account within 10 years of the account owner's death. This "10-year payout rule" has raised concerns about annual RMDs for beneficiaries who were not expecting such limitations.
The SECURE 2.0 Act, passed last year, raised the age for required minimum distributions (RMD) to 73 from 2023 onwards. Ultimately, the RMD age will be moved up to 75, providing individuals with more flexibility in managing their retirement distributions.
Changes to inherited IRAs caused confusion about when account holders and beneficiaries need to take out minimum distributions. The IRS waived penalties for individuals who didn't withdraw the required minimum distributions from specific inherited IRAs in 2020 and 2021. This was done because of uncertainties. This measure aimed to offer relief to those who may have been unsure about the revised RMD requirements during this period.
Moving ahead to the present, there has been a recent development regarding inherited IRA RMDs. The IRS declared a postponement of the final rules governing such RMDs, pushing their implementation to the year 2024. The agency has extended the time to move money from certain plans until September 30, 2023. These adjustments provide additional time and flexibility for individuals to make informed decisions and navigate the new rules effectively.
What does this latest rule delay mean?
The recent rule delay entails important implications. Some beneficiaries of inherited IRAs now have an extended period to adjust to the new distribution requirements.
The IRS will waive penalties for missed Required Minimum Distributions (RMDs) in 2023. This applies to inherited Individual Retirement Accounts (IRAs) from 2022.
However, there is a condition. The deceased account owner must have already been obligated to take RMDs. Penalties for not taking required minimum distributions (RMDs) from certain inherited IRAs in 2020, 2021, and 2022 are no longer applicable. This waiver also includes previous relief measures.
The IRS is extending the deadline for individuals to transfer funds they received earlier this year. These funds were incorrectly identified as mandatory minimum distributions. For example, if you were born in 1951 and received or will receive a distribution before July 31, 2023, you now have an extension to roll those distributions over, providing added flexibility to correct any missteps in distribution handling.
Inherited IRA Rules
Inherited IRA rules remain intricate and diverse, subject to various factors, such as account type, the original account owner's age and date of passing, and the beneficiary's status (e.g., designated vs. non-designated, age, non-spouse, etc.).
Inherited IRAs have advantages like tax-free earnings and growth. They allow transferring wealth from the original owner to beneficiaries, as long as IRS rules are followed.
However, it's crucial to be mindful of the significant tax implications associated with RMD income and timing. To understand the impact of the recent IRA RMD delay on you, consult a trusted tax or financial adviser. It is recommended to seek advice from professionals to fully comprehend the situation. Their expertise can help you navigate the nuances of inherited IRAs and make informed decisions aligned with your financial goals.
Planning Strategies for Inherited IRAs
No matter how the changes to the inherited IRA distribution rules may affect you, it is important to consider planning strategies. These strategies aim to lower your tax burden.
If you withdraw money from a retirement account before paying taxes, it will be treated as regular income. The person who receives the money will be fully taxed on it. Consequently, heirs may encounter significant alterations to their tax situation if compelled to take substantial distributions from an inherited retirement account.
The positive aspect of the delay is that it provides additional time to explore various planning strategies that might be accessible. Some of these strategies include:
Accelerating distributions during low-tax years.
Converting an inherited 401(k) to an inherited Roth IRA.
Strategizing distributions in alignment with college financial aid applications or Medicare premiums.
Considering state tax implications and potential residency changes.
Bottom Line
If you inherit a retirement account, it's important to work with a financial and tax advisor. Together, you can thoroughly evaluate your circumstances and remain vigilant about forthcoming changes.
Sources:
https://www.irahelp.com/slottreport/tag/required-minimum-distribution
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