The IRS Made a Mistake on an Inherited IRA Rule – Here are the Facts

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Investors can breathe easy knowing that a recent Internal Revenue Service post about distributions from inherited individual retirement accounts was incorrect. When the Safe Act was passed in December 2019, it completely changed the way some beneficiaries can withdraw from inherited IRAs. Before the law, non-spousal beneficiaries were allowed to take distributions from these accounts throughout their lives. With the Safe Law, they now have until the end of the 10th year from the grantor’s death to completely empty the account.

Although not as advantageous as a lifetime, the 10-year limit provides flexibility, which has the potential to work to the investor’s benefit, depending on where they are in their life. For example, a 25-year-old who has not yet reached his peak income years might be inclined to receive larger distributions early on, before reaching higher tax brackets. Comparatively, someone in their peak earning years, and who intends to have the same level of earnings or more in the next decade, might want to slowly deplete the account balance, in an effort to avoid a hefty tax bill. Want practical tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column. However, a recent IRS post on IRAs for FY2020 caused some financial advisers to think that the interpretation of that flexibility was incorrect. In Publication 590-B, which will be used to prepare 2020 tax returns, the IRS used examples (on pages 11 and 12) that suggested that beneficiaries should take the required minimum distributions each year. The examples are wrong, an IRS spokesperson said. The agency plans to revise the post to reflect the correct information, which is that recipients have 10 years to withdraw the money in any way they wish. The agency stated elsewhere in current Document 590-B that heirs have 10 years to distribute the money.