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Proposed IRS Rule Could Punish Some Retirement Account Heirs


Proposed new rules from the Internal Revenue Service for inherited retirement accounts would require multiple heirs to make minimum annual withdrawals from the accounts — leaving little room for savings. tax-deferred savings over the years.

The new rules will provide guidance for the 2019 Privacy Act, which made several changes to retirement account management laws.

For traditional individual retirement accounts, the proposed rules — which would apply to accounts inherited after 2019 — would affect heirs known as designated beneficiaries. . That category includes most beneficiaries who are not spouses, such as children over the age of 21 and grandchildren.

The new rules will not apply to Roth IRA beneficiaries. But they will affect eligible workplace retirement plan heirs such as 401(k)s, 403(b)s and 457(b)s.

Under the proposed rules, if the original account owner dies on or after April 1 of their 72nd birthday, the affected beneficiaries must make a taxable annual withdrawal that makes the account blank for more than 10 years, or incur a penalty of 50% of the required minimum distribution, or RMD, for any given year. An heir’s beneficiaries subject to the new rules will be subject to the same 10-year term as the original beneficiary.

Until now, most financial advisors have believed that affected beneficiaries of an account owner who died after 2019 are only required to empty the account by the end of the 10th year after death ( not the 10th anniversary of the death. ). While the IRS doesn’t give any specific indication of that effect, advisors often argue that annual withdrawals are not required.

“We were surprised that the IRS had given some conflicting signals in this regard,” said Sarah Brenner, director of retirement education at Ed Slott & Co., a tax consulting firm in Rockville, NY. past. complicated and troublesome to have to calculate the annual RMD using complex rules. “

For beneficiaries who inherit an account in 2020 and will be subject to the new regulations, there are still no clear guidelines from the IRS on how to handle missed RMDs for 2021. Some experts said that missed payments for 2021 should be withheld until the IRS clears the matter retroactively. (By the way, the IRS will usually forgive that hard 50% penalty on a missed RMD if you or your tax advisor explains why.)

The IRS also recommends establishing a uniform age of majority at 21 for inherited retirement accounts, regardless of state law that may have a lower or higher age or change depending on whether the child is in school. or not. Children who inherit an account won’t be subject to the new rules until they turn 21.

The open comment period for the proposed regulations ends at the end of May. A public hearing will take place on June 15, after which the final rule will be released.

Mr. Sloane is a writer in New York. He can be contacted at [email protected].

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