The Internal Revenue Service has said many who inherit an IRA must empty their accounts within 10 years of the original owner’s death, but tax officials recently gave some account holders a breather. gave room for it.
Exceptions to this rule include the original owner’s spouse, minor children, or chronically ill or disabled heirs.For everyone else, the IRS waived fines if heirs chose no To receive the required minimum distributions in 2023 for IRAs inherited after 2020, tax authorities said in a notice on Friday.
Tax experts told MarketWatch that the fine reduction, which was granted last year for the same reason, applies to inherited accounts whose original owners were old enough to start receiving the required minimum distributions prior to their death. He said he would.
“That means we can skip another year,” said Ed Zollers of Thomas Zollers & Lynch in Phoenix, Arizona. “It’s a very narrow case, but it could be important.” Told. Affected, he added.
Friday’s penalty waiver will also apply to other retirement accounts inherited after 2020, including inherited 401(K) accounts, an IRS spokesperson said.
The penalties for not receiving the required minimum distribution are as follows: up to 25% The amount that should have come out in that particular year.
The issue began with a new federal law, the SECURE Act of 2019, which stipulated that an inherited IRA must be emptied 10 years after the owner’s death (again, if the heir is the original owner’s spouse). or was not a minor child).
Those who took over the account but did not fit into these categories were given a 10-year grace period before closing the account.
Confusion over rules
Robert Dietz, national director of tax audits at Bernstein Private Wealth Management, said the IRS only took a stand on the 10-year rule, but the Treasury Department’s proposed rule would eventually empty accounts. He previously said he required heirs to make a minimum payment each year.
To bridge the confusion between IRS rules and Treasury Department rules, the IRS has introduced temporary penalty relief. “The big question is, when we look at the final regulations, will these annual distributions be mandated?” Dietz said.
The IRS taxes money from inherited accounts as ordinary income.
So, if taxpayers are already expecting higher incomes this year, IRA payments are likely to avoid the possibility of taxpayers being pushed to higher rates based on the latest penalty relief approved by the IRS on Friday. can be withheld, Zollers said.
But Dietz said it’s not always in the best interest to wait before receiving an IRA distribution. It may make more sense to take regular dividends over time, “rather than just waiting until the 10th year to get more income at the highest marginal rate.”
I have one more question. That is what the income tax rate will be after 2026.
The Tax Cuts and Jobs Act of 2017 temporarily reduced five of the seven income tax rates (the top rate was reduced from 39.6% to 37%). Without Congressional action by sunset in late 2025, tax rates will return to even higher levels, not to mention many other rules for individual taxpayers.
According to Dietz, some IRA inheritors may have the following revelation: “Maybe we should settle this in three years instead of waiting for it all. ”.
