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Under the Secure Act, certain heirs must empty inherited accounts by the 10th year after the original account owner’s death. Otherwise, they could face a hefty penalty. In 2022, the IRS proposed mandatory yearly withdrawals if the original account owner had already started distributions.
Amid questions, the IRS has previously waived the penalty for missed RMDs, and the agency on April 16 extended that relief for 2024.
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“It’s so confusing,” said individual retirement account expert and certified public accountant Ed Slott, speaking about the 10-year rule.
“Even the IRS has to give people a break until they can figure out if [beneficiaries] are subject to RMDs or not,” he said.
The latest penalty relief only applies to certain heirs, known as “non-eligible designated beneficiaries,” subject to the 10-year withdrawal rule under the Secure Act. Non-eligible designated beneficiaries include heirs who aren’t a spouse, minor child, disabled, chronically ill or certain trusts.
The latest IRS update says those heirs won’t incur a penalty for missed RMDs for inherited accounts in 2024. But they still must empty the account by the original 10-year deadline.
That “could be a little dangerous because it is potentially just letting you kick the can down the road on making a decision,” according to certified financial planner Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.
With years of delayed RMDs, heirs with sizable pretax inherited retirement accounts may need larger future distributions to empty the account within 10 years.
Before 2018, the federal individual brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. But five of these brackets are lower through 2025, at 10%, 12%, 22%, 24%, 32%, 35% and 37%. Without changes from Congress, tax brackets will revert to 2017 levels.
Depending on your tax bracket, it could make sense to start making withdrawals in 2024, especially with higher tax brackets on the horizon, Slott said.
Of course, you need to weigh your entire financial situation while planning for inherited retirement account withdrawals. “It’s one of many moving parts,” Jastrem added.
