The retirement industry just got some shocking news due to a new proposal put out by the IRS. Last February the IRS introduced a new potential rule that states the heirs of retirement accounts must drain those accounts within 10 years of receiving them.
Now more recently, the IRS stated that heirs are required to take minimum distributions in years one through nine. Since many originally did not touch this money, hoping it would grow, there may be some penalties faced, as well as high tax liability on the distributions they are be required to take.
Tax Breakdown
Some of the owners of these accounts could be facing some big tax bills since they are taxed at regular rates, with some of the highest earners potentially being taxed as high as 37%. Investors who don’t make the full minimum payment each year could see a 50% cost penalty for the unpaid amount. The IRS’ previous proposal in May of 2021 indicated that heirs would only need to empty the accounts before the 10-year timetable after the original owner’s death, not take distributions yearly.
Public Pushback
Over the last couple of months, the IRS has been bombarded with over 170 letters from the general public, accountants, lawyers, trade groups, and administrators. These letters have been about the IRS’ sudden change of position on the accounts, and complaints claiming the proposal was full of unexplained areas, making it very unclear to the accounts holders, and even their financial advisors. In light of these letters, the IRS has announced they will be holding a public hearing on June 15th on the issue. A spokesperson from the IRS declined to comment and was unsure if the hearing would be in person or virtual.
Saver Confusion
It appears that many retirement savers are just unaware of the IRS proposal for an annual distribution requirement. Most were under the impression they could wait until year 10 since inheriting, to empty the accounts. This process became even more confusing when lawmakers temporarily suspended all RMDs (Required Minimum Distributions) in 2020 as a part of a COVD-19 pandemic relief bill, also referred to as the CARES Act.
Wrap Up
The IRS seemed to have turned the retirement industry on its head with little to no clarification on how this would truly work or when it would be implemented. DSJ will keep its eyes open for any updates on this front, but if you or someone close to you might be affected by this, it could be a good idea to contact your trusted financial advisor or accountant to get a better understanding.