Investors can breathe easy knowing a recent Internal Revenue Service publication about distributions from inherited individual retirement accounts was incorrect.
When the Secure Act passed in December 2019, it completely changed the way some beneficiaries are allowed to withdraw from inherited IRAs. Prior to the law, non-spouse beneficiaries were allowed to take distributions from these accounts over their lifetimes. With the Secure Act, 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 did provide flexibility, which had the potential to work to the investor’s benefit, depending on where they were in their lives. For example, a 25-year-old who has not yet reached her peak earning years might be inclined to take larger distributions early on, before hitting higher tax brackets. Comparatively, someone in his peak earning years — and who intends to be at the same earnings level or higher in the coming decade — might want to slowly drain the account balance, in an effort to avoid a hefty tax bill.
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A recent IRS publication on IRAs for the 2020 tax year had some financial advisers thinking the interpretation of that flexibility was all wrong, however. In Publication 590-B, to be used for preparing 2020 tax returns, the IRS used examples (on pages 11 and 12) that suggested beneficiaries must take required minimum distributions each year.
The examples are incorrect, said an IRS spokesman. The agency plans to revise the publication to reflect the correct information, which is that beneficiaries have 10 years to withdraw the money in whatever fashion they’d like. The agency stated in other parts of the current 590-B document that inheritors have the 10 years to distribute the money.