The IRS has waived required withdrawals for certain Americans who have inherited retirement accounts since 2020. This change may not be beneficial for heirs, according to experts. Prior to the Secure Act of 2019, heirs could stretch retirement account withdrawals over their lifetime, reducing year-to-year tax liability. However, under the Secure Act, certain heirs now have a shorter timeline due to changed rules for required minimum distributions (RMDs). These heirs must empty inherited accounts by the 10th year after the original account owner’s death to avoid penalties.
The IRS has previously waived penalties for missed RMDs and has extended that relief for 2024. The latest update applies only to certain heirs known as “non-eligible designated beneficiaries,” subject to the 10-year withdrawal rule under the Secure Act. This includes heirs who are not a spouse, minor child, disabled, chronically ill, or certain trusts. The penalty relief for missed RMDs in 2024 allows these heirs to avoid penalties, but they still must empty the account by the original 10-year deadline.
Certified financial planner Edward Jastrem warns that this relief could be dangerous as it may allow heirs to kick the can down the road on making a decision about their inherited accounts. Heirs with sizable pretax inherited retirement accounts may need larger future distributions to empty the account within the 10-year timeline if RMDs are delayed for years. Additionally, tax brackets have changed since 2018, with five lower brackets through 2025, and they will revert to 2017 levels if Congress does not make changes.
Depending on your tax bracket, it may be beneficial to start making withdrawals in 2024, especially with higher tax brackets expected in the future. Planning for inherited retirement account withdrawals requires weighing your entire financial situation, including other moving parts. Overall, the 10-year rule for required withdrawals from inherited retirement accounts can be confusing, and experts recommend carefully considering all factors before deciding on the best course of action.
