Rules about IRAs that are passed down will change in 2025. Keeping up with changes in regulations is an important part of good financial planning as the financial world changes.
This change, which comes from the SECURE Act 2.0, will affect how people who inherit retirement accounts manage them. This could have effects on taxes and estate planning.
New rules for inherited IRAs
An individual retirement account (IRA) is a tax-advantaged savings account that helps people save for retirement. The traditional IRA works by letting you deduct your contributions from your taxes.
When a person starts taking money out of their IRA, they are taxed, but the rate of tax is usually less than what they would have paid if they had made tax-free contributions. Roth IRAs are another popular type of IRA.
With these, your contributions are made after taxes, so when you retire, you will not have to pay taxes on the money you withdraw.
A lot of people give their IRAs to family members when they die. In the past, people who inherited IRAs could “stretch” them over the lifetimes of the retirees to save more for their own retirement. On the other hand, the Secure Act went into effect in 2019.
The Secure Act says that starting in 2020, anyone who inherits an IRA has 10 years from the date of the original owner’s death to take out the entire account. This was done so that people would pay their taxes faster.
Confusion regarding the new rules
As of 2020, when the new law went into effect, beneficiaries have been very confused about how they should take out the money they inherited through an IRA.
Investors and the IRS have recently made it clear that required yearly minimum distributions (RMDs) must not go over the ten-year rule. Not all inherited IRAs will have to follow the RMD rules for withdrawals.
Joel Dickson, global head of advice methodology at Vanguard, an investment advisory firm, says, “You have a multidimensional matrix of outcomes for different inherited IRAs.
It is important to understand how these rules affect your distribution strategy.” The beneficiaries will have to plan how they give their money away so that the inheritance is taxed as little as possible.
Confirmation received in July
The IRS confirmed in July of this year that starting in 2025, certain beneficiaries will have to take yearly RMDs. This happens after penalties for not taking the required annual RMDs to follow the ten-year rule were waived for years.
If you do not take out your annual RMD, you will be charged an extra 25% of the amount you were supposed to take out. The IRS says that this can be lowered to 10%, though, if the mistakes are made on time.
Beneficiaries will need to carefully consider when and how to take out their money so that they do not lose out on taxes from both the money itself and the taxes that come with having an effective adjusted gross annual income.
Strategies could include figuring out the best distribution amounts to keep taxes as low as possible while still letting the account grow as much as possible.
If beneficiaries know what these new rules mean, they can make smart choices about how to manage the IRAs they received as gifts.
When people and families are getting ready for these changes, they will need to talk to financial experts about how to handle inherited IRAs properly.
Beneficiaries can improve their chances of being financially successful and making the most of the money they have been given by understanding these new rules.
Many families have had their lives changed by inheritance, and it would be best for them not to get fined for not following the new rules.
This new rule also stresses how important it is to plan ahead for your estate. People who have retirement accounts should think about how these changes will affect the people who will inherit their money.
People who are making or updating their estate plans should be very clear about what they want to happen with their retirement accounts and talk to the people they want to receive their money about these plans.
