Home Stock Market The IRS made a mistake about the legacy IRA rule - it's...

The IRS made a mistake about the legacy IRA rule – it’s true


Investors can rest assured to hear that a recent Internal Revenue Service publication that distribution from inherited individual retirement accounts is inaccurate.

When the Privacy Act was passed in December 2019, it completely changed the way some beneficiaries were allowed to withdraw from inheriting IRAs. Prior to the law, non-spousal beneficiaries were allowed to receive distribution from these accounts for the duration of their existence. With the Privacy Act, they now have a deadline until the end of the 10th year from the issuer’s death to completely empty the account.

Although not as favorable as a lifetime, a 10-year limit does provide Flexible, has the potential to operate for the investor’s benefit, depending on their place in life. For example, a 25-year-old young man who has not reached the highest income years may be more likely to make larger distributions early, before hitting a higher tax rate. Likewise, someone in their highest earning years – and someone who plans to be at the same or higher income level in the next decade – may want to gradually withdraw their account balance, in an attempt to avoid a huge tax bill.

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However, a recent IRS publication on the IRA for tax year 2020 had some financial advisers who argued that this explanation of flexibility was wrong. Publishing 590-B, to be used for preparing tax returns for 2020, the IRS used examples (on pages 11 and 12) where it is proposed that beneficiaries are required to make a required minimum distribution each year.

An IRS spokesperson said the examples were inaccurate. The agency plans to revise the publication to reflect accurate information, that beneficiaries have 10 years to withdraw money in whatever form they want. The agency has stated in other parts of the current 590-B document that heirs have 10 years to distribute the money.

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