Changes to Distributions of Inherited IRAs and 401(k)s:
New rules take effect for beneficiaries of IRA owners who die in 2020 or later. The new rule requires funds from inherited IRAs to be distributed by December 31 of the 10th year following the IRA owner's death. There isn't any rule on how these funds must be dispersed. It can be spread out over the ten years or all of it can be dispersed in year 10. However, the rule for surviving spouses hasn't changed. They still have the option to take an inherited IRA as his or her own. Other exceptions to the 10-year rule include minor children of the account owner, a disabled or chronically ill beneficiary, or a beneficiary who is not more than 10 years younger than the deceased IRA owner.
Distribute Estates and Trusts Before December 31:
When estate or trust income exceeds $12,750, the estate or trust should consider distributing to the beneficiaries before the year-end because the tax rate is usually much higher for the estate or trust. For estate or trust funds that aren't distributed within this time frame, the maximum 37% federal income tax rate and the 3.8% rate on net investment income may apply. This decision is important and should involve all the beneficiaries in order to avoid the unexpected consequences of a large tax bill.