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The Wall Street Journal reported on 08/02/22, in a front-page article, how the IRS’s (“Internal Revenue Services”) new rule for inheriting individual retirement accounts (“IRA’s”) will affect current and future heirs. The rule is in effect but has yet to be finalized, as the IRS is holding public hearings and asking for comments. This has caused many tax specialists to tell their clients to wait to see if the IRS makes any additional amendments to the rules.

The previous rule the IRS had was the 2019 Secure Act, which required a ten-year payout rule for inherited accounts instead of allowing those who inherited a retirement account to spread out their withdrawals over their lifetime. This act allowed heirs to wait until the tenth year before taking any payouts.

The new IRS rule changes this for cases where the original owner died on or after their required beginning date for taking distributions by forcing these heirs to take annual withdrawals that empty the account over ten years or be subject to a penalty of fifty percent of the missed required minimum distribution. Additionally, these heirs would be subject to the same ten-year window as the original beneficiary

The new IRS rule will cause heirs of retirement accounts to inherit the money during their working lives and be subject to a much higher tax bill. The heirs will also have a more difficult time inheriting their retirement accounts because they will have to either calculate the necessary amount each year or cash out the amount in the first year and pay one tax bill.

It is important to note that there are individuals that are exempt from the new IRS rule such as spouses of heirs, disabled individuals of heirs, and individuals who inherited Roth IRA’s. 

The journal recommends that the 2020 heirs who skipped 2021 distribution, should make a remedial distribution by filing form 5329, reporting the shortfall, and attaching a penalty waiver request. The journal also recommended that 2021 heirs should wait and see if the new rule changes.

For heirs of IRA’s who will be greatly affected by these new changes, talking with a reputable estate planning attorney might be the best option.

By Hannah Kelly, Law Clerk 2022