What to know about the changes to Inherited IRA distributions
HUNTSVILLE, Ala. (WAFF) - The rules around distributions from non-spouse Inherited Individual Retirement Accounts have been in flux over the past few years.
Financial expert, Jay McGowan from The Welch Group breaks down the current requirements, as it relates to the transfer of these finances. For McGowan, he says it’s all about the timing. “Typically when you inherit an IRA or an individual retirement account from somebody other than your spouse, you are required to start taking money out of that account in the year after their death,” McGowan said.
As for the distributions being in flux over these past few years, McGowan explains what people need to know.
“For IRAs that were inherited before 2020, those distributions were spread over your lifetime. So what that really equated to was smaller withdrawals each year over a longer period of time, which equated to smaller tax liabilities in those years,” McGowan said. This spread was eliminated by the SECURE Act that came around in 2020.
The new rules mean if you inherit an IRA from a non-spouse, you have to deplete that account within 10 years, but there are strict guidelines. The wealth management expert says it’s not like one can take it all in year one or in year 10, and that’s based on how old the person was when they passed.
“They’ve come out recently and clarified that and said basically, if the person that you inherited the IRA from was already taking required minimum distributions for themselves, they were in the stage of life where they had to take money out,” McGowan said. He continued and clarified by explaining how the circumstance needs to proceed. “Yes, you actually do have to take distributions in year one through nine and still have the account depleted in year 10.”
The financial expert then explains the flip side. “If they were not in required minimum distribution phase, so they were younger when they passed away, you inherited from them and they weren’t required to take money themselves, then you don’t have any requirement year one through nine, but you have to deplete it all by year 10,” McGowan said.
This is important because for those people that inherited IRAs in year In 2020, 2021 and 2022, technically they were supposed to be taking distributions in 2021, 2022, and 2023. “The IRS has come out and said that they will not, there’s no penalty for not taking those distributions in 20 21, 20 22, or 2023. So, if you inherited an IRA after 2020, you are not required to take anything this year, but you need to know that likely in 2024, you will have to start taking distributions,” McGowan said.
This is important because there’s flexibility, and the amounts that you have to take each year depending on your income can make a big difference as to how much you take in each of those years.
For more ways to stay financially savvy, head to The Welch Group’s website.
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