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New Rule Affects Some IRA Holders

 

As many businesses and individuals have turned away from pension plans, there has been a large increase in the utilization of tax-advantaged retirement accounts. This can be seen by the growth of assets held in individual retirement accounts, 401(k)s, and similar tax-sheltered retirement vehicles growing from $3 trillion in 1995 to $22 trillion in 2020. Those who are taking advantage of these accounts should now be aware of IRS guidance on some changes made through the Secure Act.

New Rules

 

Typically, when referring to a tax-advantaged retirement account the issue more commonly found is how to get money into the accounts, rather than how to get the money out. With the new set of changes, savers will need to be more concerned than ever on how much be withdrawn and when it should be withdrawn (including death or after).

New Annual Withdrawals for Some Heirs

 

The Secure Act states that many heirs of traditional or Roth IRAs (and other accounts) whose owner passed sometime after 2019 must empty the accounts within ten years; under prior law, heirs would be able to empty the accounts over decades.

There are some exceptions to this rule, as it does not apply if the heir of the account is a spouse, someone less than 10 years younger, or a disabled individual. Additionally, those who are minors (but not grandchildren) do not begin the 10-year-term until they are 21, however, these payouts will likely be in much smaller amounts.

New IRS guidance would require heirs subject to the 10-year rule to take annual withdrawals from the inherited accounts during the 10 years so long as the owner died on or after their “required beginning date” for payouts. This means after April 1st the year after the IRA owner turns 72 based on the life expectancy as prescribed in IRS Publication 590-B, and clear the remainder by the end of the 10-years.

No Annual Withdrawal for Some Heirs

 

Under new rules, some heirs who are subject to the 10-year withdrawals period do not need to take annual payouts during the 10 year period if the IRA owner died prior to reaching their “required beginning age”. Additionally, there is an exception if a traditional IRA owner dies before their April 1 required beginning date even if the owner has already taken a payout at 72. The heirs are still not required to take an annual payout because the original owner never reached their “required beginning date”.

This rule bears good news for the inheritors of Roth IRAs after 2019, as Roth IRA owners are not required to take annual payouts, so the heirs do not have to take any payouts until the end of the 10-year period.

Changes Made to Age of Majority

 

Minor children (not grandchildren) who inherit a traditional or Roth IRA can delay the start of the 10-year payout clock until they reach the age of majority” under the Secure Act. In many (but not all) states this age is 18, so to be consistent, the IRS rules deem the age of majority to be 21, at which point the 10-year clock will begin to tick.

Relief From 50% Penalty for Owner’s Last Payout

 

Many heirs forget to take a required IRA payout the year the account owner dies as it is a responsibility that falls onto themselves rather than the executor if they did not take one before death. If this is the case, the new rule allows for a waiver of the stiff 50% penalty so long as they take the missing payout by the due date of their tax return, including extensions for the year missed.

Wrap Up

 

There have been many changes to the rules and regulations surrounding tax-advantaged retirement accounts. While the IRS has issued this guidance, it is taking comments and releasing final guidance in the months to come. With so many intricate changes it would be smart to speak with an adviser to plot out your course of action for this coming year.

Call DSJ at 516-541-6549 and visit our website for more information.

 
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