The Internal Revenue Service (IRS) is set to issue its final regulations pertaining to required minimum distributions for retirement accounts this Friday.
These regulations impact retirement plan holders, as well as Individual Retirement Account (IRA) owners and their beneficiaries, under the SECURE 1.0 and 2.0 Acts.
For retirement plan holders who pass away after beginning required minimum distributions, the IRS has mandated that beneficiaries receive annual distributions, with the account being fully emptied within 10 years.
Robert Richter, Retirement Education Counsel for the American Retirement Association, noted that the final regulations largely mirror the proposed regulations, particularly emphasizing the timing of required minimum distributions following a participant’s death.
This means that distributions from a deceased plan holder’s account should match the frequency when they were alive, and all funds must be dispersed or transferred within 10 years post their passing.
This change carries significant tax implications for inheritors, potentially resulting in a higher tax burden on inherited assets over a shortened duration.
Although the IRS had previously stated that this rule would not become effective until 2024, it is likely to be implemented sooner, possibly starting next year.
The revised rules primarily impact individuals inheriting retirement accounts or IRAs, as they are now required to withdraw a specific minimum amount each year.
Previously, heirs had the option to spread out withdrawals over their lifetimes, which facilitated the growth of funds over time and often benefited the original account holder’s family.
These new regulations align with ongoing efforts in Congress aimed at preventing the affluent from sheltering and increasing their funds within retirement accounts.
However, it’s important to note that the new rule applies solely to children and other beneficiaries, excluding the spouses of retirement plan holders.
While some individuals may have overlooked mandatory payments due to changing rules, the IRS has assured that no penalties will be imposed on those who failed to withdraw annual distributions between 2021 and 2024.
Failure to comply previously resulted in beneficiaries forfeiting 25% of the retirement account’s value.
According to Kevin Thompson, a financial planner and the founder/CEO of 9i Capital Group, this change could potentially affect future inheritors of assets.
