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Did you know that improperly withdrawing from certain inherited IRAs could cost you a penalty of 25% on the amount that should have been withdrawn?
Well, The Secure Act passed in 2019 and the Secure Act 2.0, passed in 2022, brought about many changes to the Retirement Landscape which might feel overwhelming for some to digest.
Over the past few years, legislative changes and regulatory updates have reshaped the way beneficiaries handle these inherited accounts.
One of the most common areas we see these changes become particularly confusing is surrounding RMDs or Required Minimum Distributions.
The IRS recently provided final guidance on rules set to take effect this year. Let’s discuss some of the changes that we will see come to fruition this year.
RMD Changes
The first scenario we’d like to speak about is one for IRA Owners and Potential Beneficiaries.
As part of the new rule, Required Minimum Distributions or RMDs have been pushed back to 73 years old.
This number will move further back on a scale to 75 over the course of time as well.
One positive about this rule change is that it allows for the potential to experience longer tax-deferred growth.
Remember, if you need to access your Individual Retirement Accounts, you may still do so at age 59 ½, but you don’t have to take anything until age 73 as of right now.
IRA “Stretch Rule”
Looking back to before the Secure Act took effect, you may remember that if you inherited an IRA, you were able to stretch the Required Minimum Distributions over the course of your life.
This would provide potential for more opportunities to plan, potential for more flexibility, and maybe even passing the inherited retirement assets on to a 3rd generation.
With the new rule taking affect, any non-spouse who inherited an IRA on or after January 1, 2020, must withdraw the full accounts over the course of 10 years.
Further more, you must withdraw a portion of the account, each year, over the course of 10 years, resulting in the closing of the inherited IRA.
On the positive side, you do not necessarily have to spend that money if you don’t want to, but rather you may invest it, in a non-retirement oriented account.
Roth IRA
For those of you who are not familiar with what a Roth IRA is, a Roth IRA is a retirement account where contributions are made with after-tax money, the investment within the account grows tax free over time, and withdrawals in retirement are tax free too.
Although Roth IRAs experience different tax treatment from Traditional IRAs, if they are inherited, they both follow the 10-Year Rule with regards to Required Minimum Distributions.
To note, even though you must follow the 10-year rule in withdrawing from Inherited Roth IRAs, from a tax perspective, it’s important to remember that these withdrawals are tax free.
Withdrawal Penalties
As stated in the beginning of this blog, improperly withdrawing from certain beneficiary IRAs could result in a 25% penalty on the amount of money which was supposed to be taken out.
The first thing to know is that this penalty is half of the original 50% penalty assessed prior to Secure Act 2.0.
Additionally, that penalty will drop to 10% if you take the missed RMD by the end of the year following the year it was due.
An important thing to know is that the IRS stated that they will waive all penalties for missed RMDs from IRAs inherited in 2020, 2021, 2022, and 2023.
The Final Word:
Depending on the situation, inheriting money can become complex, which is why we always recommend speaking with your attorney and accountant in addition to your financial advisor.
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.
Real-life examples given in this blog should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.
A Roth IRA offers tax-free qualified withdrawals of earnings from the account. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.