Do you remember the passing of the SECURE Act and subsequently, SECURE 2.0 Act (the Acts)? People were up in arms over the loss of the ability to stretch IRAs for beneficiaries over many years, if not decades, to take advantage of tax-deferred growth and build wealth. As a result of the Acts, we got eligible and ineligible beneficiaries, and a new 10-year rule to empty the inherited IRA. That 10-year rule destroyed the stretch IRA technique.
That latter part, the 10-year rule requiring ineligible beneficiaries (basically, anyone who is not a spouse, disabled, or less than 10 years younger than the participant, eligible beneficiary) to empty the IRA, lead to some confusion around required minimum distributions (RMD) for ineligible beneficiaries. These latest, updated final regulations from the IRS on July 18, 2024 clarify the RMD issue. Previously, many ineligible beneficiaries assumed they could wait until year 10 and take a single, lump sum distribution and satisfy the new regulations under the Acts. That has been clarified.
If the deceased participant was taking RMDs, the ineligible beneficiary must continue taking RMDs to empty the account at least as rapidly as the original participant. Any remainder balance in the account must be distributed by the end of the tenth year. This means an ineligible heir may face depleting a large, inherited balance over ten years and potentially spiking their own income into a higher tax bracket! Planning is needed.
As always, the inherited IRA can be a thorny issue depending on your personal situation. For each case, the IRA participant’s age and whether they have started RMDs must be considered by the heir. Also, if you are an eligible beneficiary (spouse, disabled, less than 10 years younger), you have greater flexibility and the ability to consider other planning options. For example, a spouse could use the life expectancy rule.
The IRA inheritance and distribution rules were always complex. The Acts added even more complexity to the mix. If you have inherited an IRA (or, another type of plan), it would be good for you to reach out immediately to your financial planner and analyze your options and get a handle on the current regulations. As with everything IRS, this too could change. Stay tuned.
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