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If you inherited an individual retirement account after 2020, the timeline for withdrawing the funds may be accelerated, which could result in taxes. But experts say there are some things to consider before emptying an inherited account.
Under the 2019 SECURE Act, so-called “nonqualified designated beneficiaries” have a 10-year grace period to expend an inherited IRA. Ineligible designated beneficiaries are spouses, minor children, and heirs who do not have a disability or chronic illness. Certain trusts may also fall into this category.
Most beneficiaries don’t care about the 10-year rule. they just want money.
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Individual Retirement Account Expert
Heirs tend to allocate their inheritance to specific expenses, and “the money comes out on the way to the funeral,” he said.
In fact, nearly 40% of Americans expecting an inheritance plan to use the money to pay off debt. 2023 survey From New York Life.
Provisions of the Republicans’ signature 2017 tax reform are scheduled to be repealed after 2025, meaning individual federal income tax rates could rise even higher without changes from Congress.
Prior to 2018, the federal individual quotas were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. However, five of these categories are 10%, 12%, 22%, 24%, 32%, 35%, and 37% until 2025.
Lowering the bracket through 2025 could allow some heirs subject to the 10-year rule to take pre-tax withdrawals sooner.
But Edward Justrem, a certified financial planner and chief planning officer at Heritage Financial Services in Westwood, Mass., said the expected tax law changes are “one of many moving parts. ”.
“To some degree, I would lean towards other aspects of the client’s situation potentially being more important,” he said.
Before withdrawing money from an inherited account, you should consider temporary situations, such as the sale of a business or home, that could result in a temporary increase in income. You should also consider his projected retirement date and when you’ll start taking his RMDs from your retirement account, Justrem says.
“This is the big picture plan for each unique customer,” he said.
