Kiplinger’s Personal Finance: Family finances: IRS proposes tougher rules for inherited IRAs – Richmond Times-Dispatch

Managing an inherited IRA has never been easy, and it soon could become even more complex.

The Setting Every Community Up for Retirement Enhancement Act, which took effect in 2020, requires adult children and other non-spouse heirs to deplete inherited IRAs and other tax-advantaged accounts within 10 years of the original owner’s death. Before, these heirs could take withdrawals over their life expectancy, which cut the size of annual withdrawals and allowed untapped assets to keep growing.

The law didn’t change the rules for surviving spouses or for heirs who are disabled or are no more than 10 years younger than the original owner. They can roll the money into their own IRAs or take withdrawals over their life expectancy.

In the months after the law took effect, many financial professionals assumed the new rules meant non-spouse heirs could wait until the 10th year to deplete their inherited IRAs, which would provide them a decade of tax-deferred growth. Heirs who were planning to retire in a few years could postpone withdrawals until they fell into a lower tax bracket, which could reduce taxes on their withdrawals.

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But recent proposed guidance from the IRS puts the kibosh on this strategy. Under the proposed rules, non-spouse heirs would be required to take annual withdrawals, based on their life expectancy, if the original owner died on or after his or her required beginning date for distributions from a traditional IRA. Under current law, that date is April 1 after the year the original owner turned 72. After taking required annual withdrawals for nine years, heirs would be required to deplete the balance of the account in year 10.

If the original owner died before that date, the heirs wouldn’t be required to take annual withdrawals but would still be required to deplete the account in 10 years.

The proposed guidance also creates a conundrum for individuals who inherited an IRA after Jan. 1, 2020, and delayed taking withdrawals because they believed they had 10 years to deplete the account. Although the rules suggest they should have taken a withdrawal last year, “you can’t go back and take a 2021 distribution unless you have a time machine,” says Ed Slott, founder of He predicts that the IRS will provide a waiver for those heirs.

Seniors who want to reduce the tax burden on their heirs may want to consider converting some of the funds in their traditional IRAs to a Roth IRA. While the SECURE Act also requires non-spouse heirs to deplete Roths within 10 years, the withdrawals are tax-free. And since Roth owners don’t have to take required minimum distributions, there is no required start date for Roth IRAs, Slott says.

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