Title: Updated Regulations for Inherited IRAs: What You Need to Know
Rewritten Article:
When a loved one passes away, dealing with their retirement accounts might be the last thing on your mind. Yet, as the beneficiary, you'll have to make some decisions eventually. Failure to navigate these inherited IRA rules correctly could lead to significant tax penalties. With the 2019 passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, some new rules also apply to these accounts.
Navigating the Inherited IRA Landscape
An inherited IRA, or beneficiary IRA, is a retirement account you open when you inherit someone else's, whether an Individual Retirement Account (IRA) or an employer-sponsored plan like a 401(k). Two crucial factors determine the inherited IRA rules:
- The deceased account holder's spouse status: Spouses can roll the money into their own IRA without creating a separate inherited IRA. However, non-spouses must establish an inherited IRA, unless they take the full amount in a lump sum or disclaim the inheritance[1].
- Death date: Accounts inherited after January 1, 2020 will be subject to the new SECURE Act rules; grandfathered accounts will follow preceding regulations[1].
New SECURE Act Rules for Stretch Distributions
Under the old rules, beneficiaries could spread out required minimum distributions (RMDs) over their lifetime based on their estimated remaining life span. Since the SECURE Act's implementation, most inherited IRAs don't provide this option; instead, beneficiaries must exhaust the funds within 10 years of the account holder's death[1].
To illustrate these changes, suppose you inherit a $1 million IRA from someone who wasn't your spouse, and died on January 2, 2020.
- Under the old stretch rules:If you took RMDs starting in 2019, you could use the IRS uniform life expectancy tables to estimate your remaining life span (which, for a 35-year-old, was approximately 48.5 years) and divide the $1 million balance by that number to determine your RMD. You could then stretch the RMDs over your lifetime, ensuring maximum tax-deferral.
- Under the SECURE Act rules:Regardless of your chosen method (withdrawals within 10 years, lump-sum payment, or a full withdrawal at the end of the 10th year), the $1 million account must be depleted by the end of the 10th year[1].
Exceptions to the SECURE Act Rules
The following categories of beneficiaries can still stretch distributions over their lifetimes:
- Surviving spouses.
- Minors of the account holder (until they reach the age of majority).
- Those younger than the account holder by less than 10 years.
- Individuals who are chronically ill or disabled[1].
Managing Multiple Inherited IRAs
When multiple beneficiaries or inherited IRAs are involved, the rules become more complex:
- Separate accounts for each EDB (Eligible Designated Beneficiary) are required when dealing with multiple beneficiaries, such that the 10-year rule only applies to inherited IRAs administered after the SECURE Act[1].
- Splitting an inherited IRA among beneficiaries can be an advantageous move if done before December 31 of the year following the account holder's death[1].
- Dealing with multiple inherited IRAs requires careful consideration. Consult a financial advisor to ensure you navigate these complexities successfully[1].
By understanding these inherited IRA rules, beneficiaries can preserve the account's value and minimize tax obligations.
As the beneficiary, managing the inherited IRA's money becomes crucial to avoid hefty tax penalties. Under the new SECURE Act rules, you may need to exhaust the funds within 10 years if you inherit an IRA from a non-spouse who died after January 1, 2020.
When it comes to multiple inherited IRAs, it's essential to establish separate accounts for each Eligible Designated Beneficiary and consider splitting the inheritance among beneficiaries if done before the end of the year following the account holder's death.
