Breaking Down The IRS's New Finalized Regulations On Inherited Retirement Accounts, #215
If you’ve inherited an IRA from someone who wasn’t your spouse since 2020, you can’t miss this episode. Why? The IRS has finally cleared up a lot of questions that had been left unanswered about inherited IRAs from a non-spouse. Though I’ve covered the topic in previous episodes, I wanted to break down the regulation further in this episode.
You will want to hear this episode if you are interested in...
[1:57] The SECURE Act’s impact on inherited IRAs
[4:21] The new IRS regulations
[6:30] Eligible designated beneficiaries
[7:52] Non-eligible designated beneficiaries
[11:07] Do some tax projections
[12:34] Satisfying distribution requirements
The SECURE Act’s impact on inherited IRAs
The SECURE Act was passed in December 2019, bringing about major changes to all things retirement, including required distributions for inherited IRAs.
One of the biggest changes was the elimination of what is known as the Stretch IRA for non-spousal beneficiaries. Before the act passed, if you inherited an IRA from a non-spouse, you could choose between two distribution options:
You could empty the account within five years
You could start making withdrawals over your lifetime
The SECURE Act eliminated the second “stretch distribution” option.
With the changes, everyone thought they had a ten-year window to completely empty the retirement account. Secondly, everyone thought you could start taking those distributions at any point as long as the account was emptied by the end of the 10th year (or get hit with a tax penalty). Everyone was wrong.
The new IRS regulations
You actually have to start taking distributions the year immediately following the original account owner's death if the original owner passed away after they had reached the required age of distribution (which is currently 73).
If they passed away before the account owner reached age 73, you have a few different options when it comes to the inheritance, but it depends on whether or not you fall under the “eligible” or “non-eligible” category.
Eligible beneficiaries include a surviving spouse or disabled person, someone who is chronically ill, someone less than 10 years younger than the decedent, and minor children (or see-through trusts benefiting the aforementioned).
If the original owner died before they were taking distributions, you can take RMDs out over your lifetime OR over a 10-year period. If the person died after the required distribution date, you have to take out distributions over the longer of either your life expectancy or the beneficiary’s life.
Non-eligible designated beneficiaries would be a child, friend, or family member. If the original owner died, you can take out distributions at any point over a 10-year period. If the person died after the RMD date, you have to take out distributions based on the single life expectancy table in 10 years.
If you don’t take out the required distribution, you’ll be hit with a 25% penalty. If you didn't realize you were supposed to be doing this and make it up, the penalty is reduced to 10%.
Incorporate tax planning
If you just found out that you have to start taking distributions, don’t panic. If your income is lower this year than you think it will be next year, it might be a good idea to take more out of the account to pay the taxes at a lower bracket. Regardless, you will have to take out money next year.
Secondly, even though someone has passed away, you still have to satisfy the required minimum distribution requirements for the year they passed. You will have to take that money out by the end of the tax year.
This is all complicated to process. If you need help or have more questions, feel free to reach out at RetireWithRyan.com.
Resources Mentioned
Subscribe to the Retire with Ryan YouTube Channel
Episode #180: New Beneficiary IRA Distribution Requirements
Episode #200: IRS Update for Inherited IRAs and Roth IRAs