Inherited IRA Withdrawal Rules from the Secure Act
By: Brittany Manning, CPA, CFP®, Chief Operating Officer
By now, most people are aware the Secure Act, passed in 2020, contained major changes to the rules surrounding distribution requirements from Inherited IRAs for accounts inherited in 2020 or after. Primarily, this law eliminated the Stretch IRA provision for non-spousal beneficiaries. For the last several years, however, the requirements have been vague and undefined by the IRS.
Recently, the IRS announced its final regulations and requirements for distributions from Inherited IRAs inherited in 2020 and later. Below are some of the primary categories of beneficiaries and how they have been impacted by the final regulations from the IRS.
1. Spousal Beneficiaries: Spouses are still eligible to roll the entire inherited IRA into their name, thereby treating the IRA as their own. If the decedent has not taken their Required Minimum Distribution (RMD) in the year of passing, the inheriting spouse must satisfy the requirement and take the amount the decedent was required to take from the IRA. They will then take RMDs based on their life expectancy for the remainder of their life.
2. Non-Spousal Beneficiaries: Non-spousal beneficiaries are broken up into three categories.
a. Eligible designated beneficiaries: Eligible designated beneficiaries include minor children of the decedent, those who are chronically ill, those who are chronically disabled, and those who are not more than 10 years younger than the decedent. If the beneficiary is deemed to be an eligible designated beneficiary, their required distributions and then length of time which they must be taken will depend on which type of eligible designated beneficiary category they fall into.
b. Designated beneficiaries: Those individuals who do not fall into one of the categories to be classified as an eligible designated beneficiary will be deemed a designated beneficiary. For these individuals, if the original account owner had begun taking required minimum distributions, the beneficiary must continue taking RMDs. If the decedent had not yet begun their RMDs, no annual distributions are required. In both cases, the full value of the Inherited IRA must be distributed by the end of the tenth year after the year the original account holder died.
c. Non-individual beneficiaries: If the beneficiary of the account is not an individual (such as a charity, organization, or an estate), they are required to take distributions as follows:
i. If the original IRA account owner was required to take RMDs at the time of their death, then RMD distributions are required based on the single life expectancy of the original IRA owner.
ii. If the original owner had not yet started RMDs, the account falls into the 5-year rule, and must be fully distributed by the end of the fifth year after the original owner’s year of death.
Rules surrounding required distributions from Inherited IRAs are now more complex than ever before. It is important to review all the details surrounding an inherited IRA account so that the appropriate amount of annual withdrawals can be satisfied, and the account can be distributed within the allowable timeframe to avoid any penalties from the IRS.
Please reach out to us with any questions regarding your Inherited IRA accounts and your required distributions.
Source: https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/secure-act#:~:text=Setting%20Every%20Community%20Up%20for,Act)%20%7C%20U.S.%20Department%20of%20Labor
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