In late 2019, Congress passed the SECURE Act, which changed the rules regarding retirement savings accounts and more specially, when to take out Required Minimal Distributions (RMDs) from inherited traditional retirement accounts. Following the bill, if you were to inherit a traditional retirement account in or after the year 2020, non-spousal heirs would be required to completely empty the account within a 10-year period using RMDs.
While this may seem straightforward, during the law’s initial implementation, many inheritors and beneficiaries were confused about the vague wording of the newly published code. Many inheritors, beneficiaries, and financial-industry professionals were mistaken in thinking that they could defer taking any distributions, all the way up until the final (10th) year after the death of the owner or the inheritor came to the age of majority.
However, the IRS was mandating that RMDs were supposed to have been taken out on a yearly basis, and failure to do so would cost the inheritor an extra 25% excise tax penalty of the amount that should have been taken. The RMD amount was to be determined by the initial owner’s age at the time of death, and then use the life expectancy chart to determine the minimum distribution amount for the year.
Due to the backlash surrounding the unclear wording of the code, the IRS issued a notice in 2022 that:
- If the taxpayer did not take the specified RMD post 2020, they will not be subject to the excise tax penalty.
- The new anticipated final regulations regarding RMDs will begin January 1, 2025, which means that taxpayers are still on reprieve from having to take out any mandatory RMDs for 2024.
The IRS is still trying to iron out the minute details that come along with brand new tax codes and laws. So far it has taken them over four years to finalize the code, which gives inheritors and their planners time to decide the best possible plan of action to follow. While there are many variables to consider when to take out RMDs, if you are a client of The Wealth Conservancy, you are always welcome to reach out to your advisor if you have any questions about inherited retirement accounts. If you are interested in learning more about how The Wealth Conservancy can help with the complex aspects of an inheritance, please give us a call at 303.444.1919 or submit a consultation request to speak confidentially about your specific circumstances.