David J. Lorber, Principal, David J. Lorber & Associates, PLLC, says clients should start preparing for any changes proposed by the Internal Revenue Service (IRS) regarding the distribution of traditional Individual Retirement Accounts (IRAs) they inherited from their late family members, especially with more taxes that could be levied on the heirs.

Before 2019, the IRS allowed payments of traditional and Roth IRAs to be distributed over time. That changed in 2019 when, under the SECURE Act, payments had to be made within 10 years. In May 2021, the IRS loosened the 10-year rule by allowing the heirs to accept lump-sum payments in the tenth year. That all changed on February 2022, when the IRS proposed a new rule in which the decedents’ heirs must accept annual payments from the traditional IRAs over the next 10 years (Roth IRAs would be exempt from this rule).

“The new rule proposed by the IRS will hurt those who stand to inherit a traditional IRA from their loved ones,” Mr. Lorber says. “The forced payments cannot be tax-deferred and so this will impact their finances, especially if they are still working, since IRA distributions are taxed as if they were income.”

In addition, those who are expected to receive a payout this year must calculate their final payment at their tenth year. IRA distributions are determined by how old the recipient is and how much money remains in the account. Mr. Lorber says this will only confuse and further burden the recipients.

“The new IRS rule is asking those who are inheriting these IRAs to be accountants, actuaries and financial planners,” he says. “This is much too confusing, and the IRS should revert the IRA distribution rules to the way it was before the SECURE Act.”

To determine how much money each heir should be receiving annually from their loved one’s traditional IRA, Mr. Lorber says, the account holder should consult with an estate planning attorney as well as a certified public accountant (CPA). “Working with a CPA will help you ascertain the best ways to structure the estate to maximize the benefit to your heirs.”

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