History
As of January 1, 2020, the SECURE Act[1] required non-spousal beneficiaries inheriting individual retirement accounts (IRAs) or 401(k)s to withdraw all money in the account within ten years of the decedent’s death.[2] However, the Act did not address whether these beneficiaries had to take out a required minimum distribution (RMD) each year or had the option to leave money in the account until the tenth year.
The New Rule
The IRS has now addressed the matter head on. In July, 2024, the IRS ruled that most non-spousal beneficiaries who inherited retirement accounts in 2020 or later must take required minimum distributions from these accounts until the tenth year when any remaining funds must be withdrawn.
What does this mean for you as a non-spousal beneficiary of an inherited retirement account in 2020 or later?
- The new rules apply to both people who inherited accounts since January 1, 2020, and to future beneficiaries.
- If the person who died was required to take required withdrawals at the time of their death, the account beneficiary must take required annual distributions starting the year after death, with the calculation of how much based on the beneficiary’s life expectancy.
- There is one exception: if the owner of a retirement plan dies before they were required to take withdrawals, the beneficiary is allowed to take the inherited funds out at any time during the ten-year period, even waiting until the tenth year.
Penalties waived for failing to take required distributions through 2024
- Due to confusion about the SECURE Act rules, many non-spousal beneficiaries did not take minimal required distributions, thinking that the only requirement was to take out all money from an inherited retirement account at the end of ten years.
- The good news: the IRS will waive the penalty for not taking minimal required withdrawals for the years 2021 through 2024.[3]
- Note, however, that the new rules do not extend the ten-year period for taking out all the inherited funds.
What if I inherited a Roth IRA?
Generally, inherited Roth IRA accounts are subject to the same minimum withdrawal requirements as inherited traditional IRA accounts, though Roth withdrawals are tax free.
Planning for distributions
We suggest assessing the size of your inherited IRA account each year. If, as a non-spousal beneficiary, you only take the required distribution each year, there is the possibility of facing a large tax bill at the end of the ten-year period.
Withdrawal requirements are different for spouses
- The IRS requires an IRA owner to take required minimum distributions (RMDs), which now generally begin at age 73. The previous age for RMDs was 72. If you or your spouse turned age 72 in 2022 and had already begun taking RMDs, you and your spouse should continue to take your RMDs. These RMD rules also apply to an inherited IRA.
- If you are the spouse of an IRA owner, you generally have 4 options with respect to an inherited IRA:
- Roll over the assets into a new or existing IRA in your own name
- Transfer the assets to an inherited IRA
- Roll over the IRA assets into a new or existing IRA and then convert the IRA to a Roth IRA
- Disclaim (decline to inherit) all or part of the assets
The implications of each of the above options should be carefully reviewed and considered before making a decision on distributions. For example, spouse inheritors have additional rules regarding the timing of RMDs for inherited IRAs. You must either begin taking RMDs in the year after the year of death or delay beginning RMDs until your spouse would have turned age 73. This information is especially important if you were older than your spouse.
[1] Enacted in December 2019, the SECURE Act was effective as of January 1, 2020.
[2] If you inherited a retirement account before 2020, the required distribution rules were different, including an option to “stretch” the distribution based on the beneficiary’s life expectancy.
[3] In 2022, Congress cut the penalty for missed withdrawals to 25% of the amount that should have been withdrawn.
