Firm attorney Wayne Carrabus recently wrote an article for Long Island Business News. The piece titled “IRS clarifies 10-year rule for inherited IRAs” delves into the IRS’s recent clarification on the 10-year rule for inherited IRAs, introduced under the SECURE Act of 2019. Issued last July, this rule mandates that particular beneficiaries must thoroughly distribute the assets of inherited IRAs within 10 years of the original account holder’s death.
The clarification goes into effect in 2025, so those who did not comply between 2020 and 2024 will not be assessed penalties.
Why the clarification is important
The IRS’s clarification addresses confusion surrounding the application of this rule, particularly for non-designated beneficiaries, such as estates, charities and certain trusts. The article explains that the 10-year rule applies to most non-spouse beneficiaries, requiring them to deplete the inherited account within the specified period.
However, exceptions exist for eligible designated beneficiaries, including:
- Surviving spouses
- Minor children (10-year rule begins at adulthood)
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased account holder
These beneficiaries may still take distributions based on their life expectancy.
Attorney Carrabus emphasizes the importance of understanding these rules for estate planning and financial management. He highlights potential tax implications and the need for beneficiaries to plan their distributions carefully to avoid significant tax burdens. Additionally, he notes that the IRS’s clarification aims to provide more certainty and guidance for taxpayers and financial advisors navigating the complexities of inherited IRAs.
New estate planning strategies needed
One key point the article makes is the potential impact on estate planning strategies. For example, beneficiaries required to withdraw the entire account within 10 years may face substantial tax liabilities if the distributions push them into higher tax brackets. This makes it crucial for beneficiaries and their advisors to develop strategies that minimize tax burdens, such as spreading distributions over the 10-year period or considering Roth conversions.
Furthermore, attorney Carrabus discusses the implications for financial advisors, who must stay informed about these rules to provide accurate guidance to their clients. Advisors need to understand the nuances of the 10-year rule and its exceptions to help clients make informed decisions about their inherited IRAs.
Want to learn more?
We think the article is a valuable resource for individuals and advisors seeking to understand the implications of the 10-year rule and how to effectively manage inherited IRAs under the new regulations. It underscores the importance of proactive planning and staying informed about regulatory changes to optimize financial outcomes.
Wayne Carrabus and other experienced estate law attorneys at the firm can explain the details of the 10-year rule clarification and how the issues clarified could impact new or existing estate plans.