Overview
The rules governing inherited IRAs have undergone significant changes in recent years, particularly with the passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) of 2019 and subsequent updates under SECURE 2.0. Among other things, the Act divided individuals who inherited IRAs and qualified retirement plans into Eligible Designated Beneficiaries and Non-Eligible Designated Beneficiaries. These changes have reshaped how beneficiaries handle inherited retirement accounts, replacing the old “stretch IRA” strategy with a stricter timeline for withdrawals for some beneficiaries.
Eligible Designated Beneficiaries (EDB)
Some beneficiaries can still spread withdrawals over their lifetime. Their required minimum distributions (RMDs) for inherited accounts are still calculated based on life expectancy.
Eligible Designated Beneficiaries include:
- Spouse
- Beneficiary not more than 10 years younger than the account owner (including beneficiaries older
- than the account owner)
- Disabled or chronically ill individual
- Minor child of the account owner (until age 21)
- Beneficiary of an account owner who died before January 1, 2020
Non-Eligible Designated Beneficiaries and the 10-Year Rule
Beneficiaries who do not fall into the EDB category are required to fully distribute inherited IRAs and qualified retirement accounts within 10 years of the original owner’s death. This rule applies to IRAs or qualified plans inherited after January 1, 2020.
Example:
- If you inherit an IRA from your sister who is three years older, you can use your own life expectancy to stretch distributions from your Inherited IRA.
- If you inherit an account from a parent, you have 10 years to empty the account.
Minimum Required Distributions for Beneficiaries Under the 10-Year Rule
There was considerable debate with the IRS over whether beneficiaries subject to the 10-year rule must take required minimum distributions (RMDs) during the 10-year period, or if they could defer all withdrawals and empty the account in the year of the 10th anniversary of the account owner’s death. The IRS has now issued final regulations clarifying the rules for beneficiaries under the 10-year rule regarding RMDs.
The IRS’s Final regulation issued in 2024 require non-eligible designated beneficiaries to take RMDs in the intervening years through year nine, effective January 1, 2025.
Final Regulations:
- If the account owner died before RMD:
- The beneficiary does not need to take annual distributions but must fully empty the account by the end of the year that includes the 10th anniversary of the account owner’s death.
- If the account owner died after RMD:
- The beneficiary must take annual required minimum distributions and fully empty the account by the end of the year that includes the 10th anniversary of the account owner’s death.
Beneficiaries who do not fall into any of these categories follow the rules that were in place before the SECURE Acts.
Planning Considerations
The 10-Year Rule can create big tax challenges. While you can withdraw as much as you need from an inherited account, taking large amounts all at once could push you into a much higher tax bracket.
Smart planning can help you avoid surprises and keep more of your inheritance working for you.
Want to make the most of your options? Your financial professional can create a personalized strategy to help you navigate these rules and minimize taxes.
This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your taxadvisor or attorney.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken priorto reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
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