a New rule regarding Inherited IRAs It could lead to a lot of confusion and larger than expected tax bills for many people in United States of America.
Prior to the enactment of the SECURE Act, those with IRAs could extend required minimum distributions (RMDs) to these accounts over their entire expected life.
The span can span decades for younger heirs, which means they can make smaller distributions and defer taxes as the accounts grow.
What are the new rules for inherited IRAs?
In an effort to speed up tax collection processes, the SECURE Act repealed the mechanism that allowed heirs to extend their RMD in this way. This now means that the entire balance must be distributed within 10 years of death.
Eligible Designated Beneficiaries (EBD) such as surviving spouses or people with chronic illnesses may continue to extend the payments over their expected life.
Or, if the deceased passed away before the required start date (RBD), they may opt for a 10-year treatment rule. The ten-year rule will apply to the outstanding amounts upon the death of the EDB.
The ten-year rule also applies to trusts, including transparent trusts or trusts that use an older beneficiary’s age to extend the category of RMD and prevent younger or spendthrift beneficiaries from quickly draining inherited accounts.
There have been a series of tweaks and twists around the topic but perhaps a middle ground has been found. A required start date is an essential detail.
When will the rules for inherited IRAs change?
According to proposed regulations, effective January 1, 2022, non-EDB members who inherit an IRA or pre-RBD defined contribution plan for the deceased meet the ten-year rule simply by taking the full amount before the end of the calendar year that includes the tenth anniversary of death.
Regulations take a different course upon or after the death of the deceased.
If the 10-year rule is kept in place, it means that non-EBD people will need to get serious about tax planning much sooner than they would have previously needed as all of that would have to be paid within 10 years.
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