Coming Changes to Inherited IRA rules

In 2019, Congress changed the law regarding inherited IRAs. At the time, the new law said that people that inherit an IRA from a non-spouse had 10 years to liquidate the account. This rule does not apply if the heir is a spouse, someone less than 10 years younger (often a sibling) or a disabled individual. (The clock starts on the 10-year rule for minor children once they turn 21). 

For other heirs, such as adult children, the laws put in place in 2019 said that they could so equally each year, or in lumpy amounts, or even save the sale of investments until the 10th year (which would be very tax inefficient). Please note that the 10-year rule applies to IRAs, but not Roth IRAs, which is another reason that Roth IRA conversions make sense. 

The I.R.S. is now clarifying those “10-year” rules. Heirs subject to the 10-year rule must in fact take annual withdrawals from the accounts during that period if the original owner died on or after his or her “required beginning date” for payouts. Under current law, that’s April 1 after the year in which the IRA owner turns 72.

For heirs that inherit an IRA that had not yet turned 72, there is no requirement to take annual payouts during that period and can instead take payments in years they choose—as long as the account is fully liquidated by the end of the 10th year of inheritance.  (There is a small twist in all of this associated with people that died during their 72nd year—the IRS treats them as not having reached the age of required distributions). 

Please note that this is just a proposed change for now, but will quite likely be enacted later in 2022, and grandfathered into the start of the year. So you may as well start planning around this set of rules now.