Earlier this year, the IRS provided long-awaited guidance related to the SECURE Act of 2019 on the treatment of retirement accounts inherited after December 31, 2019. The rules are complex, and we strongly encourage anyone who has inherited an IRA to work with their financial advisor or tax professional to understand their options. This article is not intended to act as personalized tax advice; rather, it is designed to clarify the rules that apply to the majority of beneficiaries who inherited IRAs in 2020 or thereafter.
Please note that if you inherited a retirement account prior to January 1, 2020, the rules described in this article do not impact you. Additionally, while these new requirements apply to IRAs inherited after December 31, 2019, the IRS has waived the penalties associated with not taking required minimum distributions (RMDs) in cases where the 10-year rule applies, for the tax years 2020 through 2024.
Inherited IRA Required Minimum Distribution Requirements for Accounts Inherited After December 31, 2019
Spouse as Beneficiary
- Spousal Rollover – When a spouse is the beneficiary of a retirement account, it is most common for the survivor to complete a “spousal rollover.” The spouse becomes the new IRA owner, and calculations for RMDs are based on the surviving spouse’s life expectancy.
- Another alternative, although less common, is to keep the IRA in the deceased owner’s name as an Inherited IRA.
- If the deceased individual died before their RMDs started, the balance must either be distributed within 10 years of their death, or annual distributions, based on the deceased owner’s age, can be taken over the survivor’s lifetime.
- If the deceased individual died after they started taking RMDs, annual distributions based on the deceased’s life expectancy must continue to be taken by the spouse.
Non-Spouse as Beneficiary
- If the deceased individual died before starting their RMDs, the balance of the account must be withdrawn within 10 years of their death. You can employ any strategy you wish to deplete the account, but you need to deplete it by December 31st of the 10th year.
- If the deceased individual died after starting their RMDs, you must continue to take annual distributions based on your life expectancy, and you must also withdraw the entire account balance within 10 years of death.
ROTH Accounts
- Spouse beneficiary – If you inherit your deceased spouse’s ROTH IRA, you would complete a spousal rollover to move their account into your name. No distributions would be required, and the distributions would not be taxed.
- Non-Spouse Beneficiary- If you inherit a ROTH IRA and you are not the spouse, you will be required to withdraw the balance by the end of the 10th year. The distributions will not be taxed.
Notable exceptions for non-spouses:
As mentioned above, this article is designed to clarify the rules that will apply to most beneficiaries who inherited an IRA after December 31 2019. However, there are some notable exceptions:
- The original law identifies a special class of non-spouse beneficiaries who are considered “eligible designated beneficiaries.” These beneficiaries are not subject to the 10-year rule and can elect to take “stretch” distributions based on their life expectancy. Eligible designated beneficiaries include minor children, the disabled or chronically ill, and non-spouse beneficiaries who are not more than 10 years younger than the deceased IRA owner.
- Note that a minor child who inherits an IRA is considered a minor until they reach their 21st birthday. Upon reaching the age of majority (at 21), the child would then be considered a non-spouse beneficiary and no longer an “eligible designated beneficiary.” At that point, the 10-year rule would apply, and the entire account balance would need to be distributed within 10 years of their 21st birthday.
Key Takeaways and Planning
The new rules emphasize the importance of thoughtful and strategic planning for inherited retirement accounts. For some beneficiaries, taking distributions sooner may be advantageous, while for others, delaying them as long as possible may be the best approach. It’s essential to balance the benefit of tax deferral with the goal of minimizing the overall tax burden throughout the life of the IRA, while also ensuring compliance with the relevant tax rules. Consulting with a financial advisor who understands IRS regulations and can help you determine the best strategy for your specific situation is highly recommended.