Inheriting an IRA presents a number of choices for the beneficiary. Whether it’s a Roth or Traditional IRA, the rules surrounding the inheritance can be complicated and your decisions can have a significant impact on your financial planning.
When the so-called “stretch IRA,” was virtually eliminated by passage of the 2019 SECURE Act, beneficiaries of inherited retirement plans needed to re-consider when to receive distributions and the tax implications of that decision.
Under the SECURE Act there is a 10-year rule, which means there is no annual distribution requirement for the first nine years after the death of the IRA holder. Instead, the beneficiary must clear the account by the end of the 10th year of the person’s death. According to the IRS, the IRA can continue to grow tax-deferred for 10 years and then must be fully distributed.
The Act also raised the required minimum distribution age to 72 and created Eligible Designated Beneficiaries (EDBs), a new class of beneficiaries who can withdraw from an inherited IRA over a longer period of time.
The EDBs are:
1. Surviving spouses
2. Chronically ill beneficiaries
3. Disabled beneficiaries
4. Minor children of the account owner ( up to the age of majority, or 26, if still in school)
There are a number of advantages to individuals in one of the above-mentioned categories, as distributions can be taken over the beneficiary’s lifetime and there’s no timeline for when the account must be emptied. However, according to the law, a required minimum distribution must be taken regardless of whether the account is a Roth or Traditional IRA.
As always, it is advisable to consult with your tax advisor as you navigate such an important decision that can have far-reaching implications for your financial future. Our experienced, professional staff is here to guide you and answer any questions you may have.