When the SECURE Act was making its way through the House and Senate in mid-to-late 2019, senators claimed that the legislation would “make significant strides in fixing the nation’s retirement crisis and helping workers of all ages invest and save for their futures.” For heirs holding portions of inherited IRAs, proposed rule changes may create a retirement savings future that is significantly less secure.
On February 24, the IRS published a Proposed Rule relating to required minimum distributions and, in turn, to changes in required payouts for those inheriting IRAs. Or to be exact, heirs of traditional IRAs, not Roth IRAs, according to the Wall Street Journal.
Although the SECURE Act has created provisions regarding things like 401(k) participation options and flexibility for employees and small businesses, it has also impacted IRA contributors significantly. By eliminating the “stretch IRA” (which allowed a beneficiary to better control disbursements of their tax-sheltered assets over time) and stipulating full payouts from the inherited IRAs within 10 years of the death of the original account holder, taxes will need to be paid sooner.
Although some heirs are exempt from having to take full IRA payouts within 10 years including spouses, those less than 10 years younger than the deceased, disabled individuals, for those who are not, the proposed rule tweaks the inherited IRA rules already tweaked by the SECURE Act.
The 10-year payout rule for all inherited IRAs whose owners died after 2019, but it was commonly thought that one could defer taking any payouts until the 10th year. However, the proposed IRS rule would require annual withdrawals by heirs of traditional IRAs according to the owner’s “required beginning date” which is on April 1 of the year following when the IRA owner turns 72.
If the original traditional IRA owner failed to reach his or her “required beginning date,” the heir would be required to empty the account in the 10th year. To anger traditional IRA owners and inheritors a little more, this proposed annual payout rule doesn’t apply to those inheriting Roth IRAs after 2019, who may wait the 10 years to take the full payout.
As more and more investors look to bank on the variety of tax-deferred individual retirement accounts and 401(k)s rather than to rely on traditional pension plans, the SECURE Act’s established regulations and the IRS’ Proposed Rule on Required Minimum Distributions may prompt retirement savers to rethink their investment choices and who they choose as beneficiaries.
Comments on the proposed rule will be received until May 25, 2022, and a public hearing is scheduled for June 15, 2022.
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