In 2019, the United States Congress enacted the Secure Act and changed the rules for inherited individual retirement accounts (IRAs). The Secure Act changed the rules governing the timing of distributions from IRAs after the death of the original owner. Here is what you should know about inherited IRAs today.
What’s New for Inherited IRAs?
The Secure Act implemented a new mandatory 10-year withdrawal rule. This means that if you are a non-spouse beneficiary of an inherited IRA, you must withdraw the entire balance within 10 years of the original owner dying.
This is a tremendous change from the way things were before the Secure Act. In the past, if you were a qualified beneficiary of a retirement account, you could stretch the distributions from that account over your life expectancy.
If you were a young beneficiary, the required minimum distributions (RMDs) would have been small, and likewise, the tax burden on those distributions would have been small as well.
Now, however, you must withdraw the entire balance of the retirement account within 10 years, unless you qualify for an exception. If you have inherited an IRA, it is important to understand that the change to a mandatory 10-year withdrawal period will have a direct effect on your tax burden.
Exceptions to the Mandatory 10-year Withdrawal Rule
Exceptions to the mandatory 10-year withdrawal rule exist for the following categories of beneficiaries, collectively referred to as eligible designated beneficiaries:
- A spouse of the original owner
If you were the spouse of the original owner of an inherited IRA, you are entitled to stretch distributions from that account over your life expectancy. Alternatively, you can roll your deceased spouse’s IRA over into your own IRA.
- An individual who was no more than 10 years younger than the original owner
Like spouses, a beneficiary who is younger, but relatively close in age to the decedent, can stretch distributions from an inherited IRA over their life expectancy.
- A minor child of the original account owner
If you are a minor child of the original account owner, you can receive RMDs from an inherited IRA based on your life expectancy until you reach the age of 18. Once you reach the age of 18, you will have to withdraw the total balance of the account within 10 years, just like under the general rule.
- A disabled or chronically ill individual
Disabled and chronically ill individuals, as defined by the Secure Act, are also entitled to stretch distributions from an inherited IRA over their life expectancy.
Other Things to Keep in Mind
The mandatory 10-year withdrawal rule applies to defined contribution plans, such as 401(k), 403(b), 457(b) plans and both traditional and Roth IRAs. But it does not apply to defined benefit plans.
Also, even if you are an eligible designated beneficiary and are entitled to stretch distributions from an inherited IRA over your life expectancy, the entitlement does not extend to the next generation. In other words, once you die, your own beneficiaries will have to withdraw the entire balance of whatever is left in the IRA within 10 years.
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