The Basics of Inherited IRAs - Adviser Investments

The Basics of Inherited IRAs

In our latest Adviser Takeaway video, Manager of Financial Planning Andrew Busa explains changes to the rules surrounding inherited IRAs following the passing of the SECURE Act.

We’ve also received numerous questions from clients about the rules for inherited IRAs and how they’ve changed with successive rounds of legislation. Here’s a roundup of some of the most common ones and our answers:

How did the SECURE Act impact inherited IRAs?

The 2019 legislation put an end to the “stretch IRA,” whereby individual retirement accounts could be passed along from one generation to the next, earning tax-free growth with few limitations. Instead, the SECURE Act implemented a 10-year rule for certain non-spouse heirs requiring the entire IRA account to be disbursed by the end of the 10th year following the original IRA owner’s death.

The 10-year rule does not apply to what are called “eligible designated beneficiaries” (surviving spouses, children under 21 years old, disabled or chronically ill beneficiaries, or those within 10 years of age of the decedent). Those folks can continue to stretch!

How does the IRS waiver change things?

In March 2022, the IRS threw an additional monkey wrench into the 10-year rule, suggesting that if the original IRA owner died before they were required to begin taking required minimum distributions (RMDs, which start on one’s 72nd birthday), then certain beneficiaries must empty the account in 10 years and take annual RMDs in years one through nine. This unexpected guidance caused quite a bit of confusion.

To alleviate the chaos, in October 2022 the IRS said that it was waiving penalties for missed 2021 and 2022 required payouts within the 10-year window. This seems to indicate that the proposed 10-year rule will not apply until 2023. That said, we expect to hear final guidance from the IRS on this topic sometime this year.

Yes, it’s complicated. This visual does a nice job of summing up the high-level rules.

Flowchart of inherited IRA beneficiary rules
Sources: Michael Kitces, Adviser.

What about “year-of-death” RMDs?

Regardless of the IRS waiver, if the original account holder needed to take an RMD in the year of their death and did not take it before they died, it’s the responsibility of the beneficiary to take it by Dec. 31 of the year the original account holder passed away.

Remember, eligible designated beneficiaries are not impacted by most of these rules. Beneficiaries who inherited before the SECURE Act went into effect can continue to “stretch.” Yes, there are a lot of nitty-gritty nuances.  Luckily, you don’t need to sort through the rules or commit any of this to memory. Talk to your adviser today—our team is well-versed in the details and ready to help.


Additional Secure Act 2.0 Resources

For informational purposes only; not a recommendation to buy, hold or sell any investment product. Past performance is not an indication of future returns. Speak with a financial advisor before taking specific action. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. Always consult a professional regarding your specific situation.