The Internal Revenue Service (IRS) has released new guidelines confirming a 10-year withdrawal limit from inherited retirement accounts. This rule applies to almost all beneficiaries except for a select few, such as surviving spouses and minor children. As a result, non-spouse beneficiaries of significant retirement balances could face considerable tax burdens.
The Secure Act of 2019 first specified this 10-year withdrawal period, and the IRS has now detailed mandatory distribution frequencies. Exceptions exist for “eligible designated beneficiaries,” which usually include individuals with disabilities, chronically ill individuals, minor children, or beneficiaries not more than ten years younger than the decedent. However, the Act doesn’t clarify the age of majority for minors; it varies by state.
Required Minimum Distributions (RMDs) depend on whether a person is required to make annual withdrawals. Most retirement accounts, except Roth accounts, must have at least yearly withdrawals, with the distribution size based on certain factors such as the balance and age of the account owner.
Understanding the 10-year withdrawal limit on inherited retirement accounts
Roth accounts are exempt as taxes have been pre-paid.
If the original account owner had to take RMDs, the inheriting beneficiaries must also make annual withdrawals over ten years. If the original owner wasn’t required to make distributions, beneficiaries can decide when to withdraw before the end of the ten years.
The updated regulations will begin to take effect from September 17, 2024, keeping the 10-year timeline for beneficiaries. The rules also state that RMDs don’t need to operate retroactively for beneficiaries, allowing for greater flexibility.
The recently implemented rules may confuse due to changes in the mandatory distribution age and differences between types of investments—Roth or traditional. The IRS allows beneficiaries to withdraw from inherited IRAs without penalties, provided they follow specific intervals. Non-spousal beneficiaries must entirely withdraw inherited IRA funds within a decade, and potential tax implications should not be overlooked.
The new rules can be complex, and it’s advisable to consult a financial advisor before making any decisions. While some investors might view the extended delay as an opportunity to grow their accounts, this could lead to larger RMDs and potentially higher future taxes. Beneficiaries are advised to seek professional guidance from a financial expert where they hold their inherited assets.
