If you inherit a retirement account like an IRA or 401(k), you generally have 10 years to withdraw the money according to the SECURE Act of 2019. The IRS has now made it clear that you must take out a minimum amount each year.
What Changed?
The 2019 law required many who inherited retirement accounts to withdraw all the money within 10 years, but it wasn’t clear if this had to be done yearly or just once at the end of the timeframe. Many decided to forgo annual withdrawals and left the money to grow, but now the IRS clarified that you must withdraw some each year with the recently published final rules.
Key Points of the New Rules:
Spouses and Young Inheritors: These rules don’t apply to spouses or if the account owner died before they had to start taking Required Minimum Distributions (RMDs) – today, that is anyone under age 73.
Required Annual Withdrawals for Inheritors: If the retirement account owner who passed away was already taking RMDs, you must start taking money out each year starting the year after their death. Note: The rules say that if the owner of a retirement account hasn’t satisfied their entire RMD prior to their death, that their beneficiary/ies need to take the remaining RMD by year-end. Failure to do so results in the application of the 25% (10% if timely corrected) RMD penalty.
No Penalties for 2021-2024: Because of confusion, many didn’t withdraw money from 2021 to 2024. The IRS won’t penalize those inheritors for missing withdrawals in these years.
Reduced Penalties: Starting in 2023, the penalty for missing withdrawals is 25% of the amount you should have taken out, down from 50%.
10-Year Withdrawal Period: You must finish taking out all the money within 10 years. Starting in 2025, you must make annual withdrawals based on your life expectancy. The final rules don’t extend the 10-year period.
Tax Considerations: Withdrawals from traditional retirement accounts are taxable. Taking only the required minimum each year could lead to a large withdrawal and tax bill in the final year.
The goal of true wealth management is to minimize the amount of money lost to taxes over your lifetime. IRS and RMD rules can be complex, with many factors to consider for effective planning. To determine the best withdrawal strategy when inheriting a retirement account, please consult with your CWA advisory team and your tax professional.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this information.
