Secure Act Inherited IRA Distribution and Inheritance Rules

The Secure Act made significant changes to inherited IRA distribution and inheritance rules. Beneficiaries of inherited IRAs are now subject to required minimum distributions (RMDs) starting at age 72, unless they are a spouse or a minor child.

The 10-year rule is a key change under the Secure Act, requiring inherited IRA beneficiaries to distribute the entire account balance within 10 years of the account owner's death.

Spouses of deceased IRA owners have more flexibility, as they can choose to roll over the account into their own IRA or take distributions based on their own life expectancy.

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Eligible Designated Beneficiaries (EDBs) are individuals who can still implement the stretch IRA strategy.

They can fall into any of these five categories: surviving spouse, disabled individual, chronically ill individual, any other individual not more than 10 years younger than the deceased IRA owner, or minor child of the IRA holder under age 21.

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EDBs can stretch their IRA distributions over their lifetime, not just a 10-year period.

If you're a surviving spouse, you're automatically an EDB.

If you're a disabled individual, you're also an EDB if you meet the IRS's strict rules.

Chronically ill individuals are also considered EDBs.

And if you're not more than 10 years younger than the deceased IRA owner, you're an EDB too.

Minor children under 21 are also EDBs, but they can only stretch their distributions until age 21.

After that, the 10-year rule applies to them as well.

Here's a quick rundown of the EDB categories:

Designation refers to the process of identifying the individuals who will inherit an IRA after the original owner passes away. This is a crucial step in determining the tax implications and distribution rules for the inherited IRA.

Eligible Designated Beneficiaries (EDBs) are a special group of individuals who can still implement the stretch IRA strategy. This group includes a surviving spouse, a disabled individual, a chronically ill individual, any other individual not more than 10 years younger than the deceased IRA owner, and a minor child of the IRA holder under age 21.

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The 10-year rule applies to designated beneficiaries who don't qualify as EDBs. This rule requires the inherited IRA to be distributed within 10 years of the original owner's passing.

A non-eligible designated beneficiary is defined by the IRS as all designated beneficiaries who don't qualify as an eligible designated beneficiary. This group includes adult children inheriting an IRA from their parents, who are most impacted by the 10-year rule.

The distinction between EDBs and non-eligible designated beneficiaries is key in determining the distribution rules for an inherited IRA. Understanding these designations can help you make informed decisions about your own IRA inheritance.

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Inheritance rules can be complex, but let's break it down. For non-spouse beneficiaries, the SECURE Act introduced the 10-year payout rule, which requires them to fully deplete the account balance within 10 years starting the year after the decedent passed away.

However, there are exceptions to this rule, and it's essential to understand which type of beneficiary you are. According to the SECURE Act, non-spouse beneficiaries are categorized into three types: non-eligible designated beneficiaries, non-designated beneficiaries, and eligible designated beneficiaries.

Here are the exceptions to the 10-year rule: Surviving spousePerson less than 10 years younger than the decedentMinor childrenDisabled personChronically ill personSome See-Through Trusts benefitting someone on this exception list

If the decedent passes away after their Required Beginning Date for RMDs, the non-spouse beneficiary is subject to both the 10-year rule and annual RMDs during that 10-year period. This means they'll need to take annual distributions from the inherited IRA account.

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Most non-spouse beneficiaries are subject to the 10-year payout rule.

Non-eligible designated beneficiaries are one of the three types of beneficiaries outlined in the SECURE Act.

There are also non-designated beneficiaries and eligible designated beneficiaries.

The type of beneficiary you are will dictate the inherited IRA rules that you need to follow.

Non-eligible designated beneficiaries are subject to the 10-year payout rule.

If the decedent passes away before their Required Beginning Date, you're subject to the 10-Year Rule. This means you have 10 years to deplete the account balance.

You won't be required to take annual Required Minimum Distributions (RMDs) during this 10-year period. You simply need to use the funds wisely to empty the account before the deadline.

Brad's father, for example, passed away at age 68, and Brad was the beneficiary of his Traditional IRA. Since Brad's father was born in 1956, his RMD start date would have been at age 73.

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If the decedent passes away after their Required Beginning Date for RMDs, it's a bit more complicated for non-spouse beneficiaries.

They're subject to both the 10-year rule and annual RMDs during that 10-year period.

This means they'll have to take annual distributions from the inherited IRA account, in addition to depleting the account balance within the 10-year timeframe.

For example, if Dave's father passed away at age 80 and had been taking RMDs for many years, Dave will be subject to the 10-year rule and also required to take annual RMDs every year from the Inherited IRA account.

This can be a significant burden, especially if the account balance is large.

To illustrate this, consider the following table:

As you can see, the rules are different depending on when the decedent passes away in relation to their RMDs.

If you inherited a retirement account from someone who passed away after December 31, 2019, and you're a non-spouse beneficiary, you're subject to the 10-Year Rule. This rule requires you to fully deplete the account balance within 10 years, starting from the year after the decedent passed away.

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The 10-Year Rule applies to most non-spouse beneficiaries, unless you qualify for an exception. To be exempt from the 10-Year Rule, you must meet one of the following criteria:

If you're a minor child beneficiary, you're only required to take annual RMDs until you reach age 21. Once you turn 21, you'll be subject to the 10-Year Rule and must fully distribute the retirement account within 10 years. The age of majority for triggering the 10-Year Rule is 21, regardless of the state's age of majority law.

For example, if a 12-year-old child inherits a retirement account from their parent, they won't be subject to the 10-Year Rule immediately. Instead, they'll be required to take annual RMDs until they reach age 21, at which point they'll be subject to the 10-Year Rule.

The 10-Year Rule applies to both pre-tax and Roth retirement accounts. This means that regardless of whether you inherited a Traditional IRA, SEP IRA, 401(k) account, or a Roth IRA or Roth 401(k), you'll be subject to the 10-Year Rule.

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If you're a non-spouse beneficiary of an IRA, the age of the decedent can impact your Required Minimum Distribution (RMD) requirements.

The date at which RMDs are required to begin varies based on the decedent's date of birth. For example, someone born in 1956 would be required to start taking RMDs from their pre-tax retirement accounts at age 73.

Here's a breakdown of the RMD requirement ages based on the decedent's birth year:

Your age relative to the decedent's age is also a factor in determining your RMD requirements. If you're a non-spouse beneficiary not more than 10 years younger than the decedent, you're exempt from the 10-year distribution rule.

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The SECURE Act has changed the way non-spouse beneficiaries withdraw funds from inherited IRAs, eliminating the Stretch IRA strategy.

Before the SECURE Act, nonspousal beneficiaries could stretch their IRA withdrawals over their life expectancy, but this tactic is no longer available.

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The new 10-year distribution rule requires beneficiaries to deplete the account within 10 years of the owner's death.

This rule applies to most non-spouse beneficiaries, but the distribution process differs depending on whether the account owner began taking required minimum distributions (RMDs) before their death.

If the account owner began taking RMDs before their death, the beneficiary must take the RMD annually following the first year of death through the ninth.

The amount the beneficiary receives depends on their age, causing younger beneficiaries to receive smaller amounts.

The 10-year rule can be complicated, and the IRS has clarified that RMDs will still be required in years 1 through 9 in conjunction with the 10-year rule if the account owner died on or after their RMD start date.

This means beneficiaries will have to take RMDs and follow the 10-year distribution rule simultaneously, which can be confusing and overwhelming.

To avoid problems, it's essential to meet with the original account owner, if possible, to work through the details and complete any necessary forms accurately.

Meeting with a financial advisor can also help you navigate these rules and regulations according to your specific financial situation.

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