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You Inherited an IRA - Now What?



Individual Retirement Accounts (IRAs) have become a significant asset of many Americans. Estimated balances in IRAs at the end of 2021 were over $13 Trillion dollars. A lot of those balances came from rolling over pension balances from employers, and therefore, can be quite substantial. Even those who merely contributed to their IRA over the years when contribution limits ranged from $1,500 to $7,000 per year can have hefty balances assuming they invested the money prudently.


HISTORY OF INHERITED IRAS

The tax code before 2019 was very friendly to those who inherited an IRA. Beneficiaries had to make an annual withdrawal, but that amount was based on their life expectancy in the year they received their inheritance. So, for instance, if a 50-year-old inherited an IRA, they would begin by taking out only about 3 percent of the account each year. That percentage would go up a little each year to ensure that the account was empty by the time they died. The IRS tables assume a life expectancy of about 85 years.


CHANGES WITH THE 2019 SECURE ACT

Things changed near the end of 2019 with the passage of the SECURE Act. That act had a lot of good retirement provisions like extending the Required Minimum Distribution beginning age from 70 ½ to 72, but one that wasn’t so friendly. Beginning with inherited IRAs in 2020, the provision to “stretch” the IRA distributions out over one’s lifetime was revoked. In its place, a new 10-year rule was enacted. At the time, it seemed to indicate that one could withdraw an Inherited IRA balance anytime within 10 years.


MORE CHANGES ON THE HORIZON

But, early in 2022, the IRS proposed regulations that might put a crimp in the plans of those who would rather wait the 10 years to withdraw the money, letting it grow instead. The proposed regulations require most beneficiaries to begin the annual required distributions under the old rules (not so bad) but must empty the account within 10 years (not so good). Spouses are generally exempt, as they can rollover their spouse’s IRA to their own.


The IRS will collect feedback on the proposed regulations before they become final. Most experts did not expect this twist, and had recommended to inheritors that they need not begin distributions for inherited IRAs in 2021 or 2022. So, there would need to be some provision for exempting those required distributions if the new proposed regulations are made final.


Required Minimum Distribution rules are very important to follow-the penalty for not taking one is 50 percent of the missed payment, plus you still have to pay the regular income tax.