New Inherited IRA Withdrawal RulesJune 28, 2023
Inherited retirement accounts are becoming more common as we see generational wealth passing to loved ones. The options for dealing with inherited IRAs can seem overwhelming. Additional guidance may be needed for new inherited IRAs. Rules from the SECURE Act and SECURE 2.0 Act would apply to inherited IRAs where the IRA account holder dies after 2022. Schwab has detailed scenarios that can be reviewed here.
Qualifying questions should be raised to determine the best guidance for our clients:
- What type of beneficiary will this be?
- Eligible designated beneficiaries are listed as the beneficiary on the account and are also one of the following: the spouse or minor child of the deceased, an individual less than ten years younger than the deceased (a sibling, for example), or an individual who is chronically ill or disabled. Note that only spouses can transfer the assets to their own IRA, making the account a regular IRA versus an inherited IRA.
- Designated beneficiaries are listed as the beneficiary on the account but do not fall under one of the special categories mentioned above.
- Non-designated beneficiaries are not listed as the beneficiary on the IRA account itself but are listed as the beneficiary in a will or received the assets via an estate or trust. Note the importance of having an IRA beneficiary listed on all IRA accounts. Passing to an estate automatically reduces the ten-year withdrawal period to five years simply because of the non-designated beneficiary status.
2. What type of IRA is involved?
- ROTH IRA – The five-year holding period for ROTH IRAs still applies in the situations listed above, so be mindful of any newly converted ROTH IRA accounts.
- Traditional IRA – When the ten-year rule (five years if inheritor of the IRA is an estate) applies, deferring to take a lump sum distribution in the tenth year may not make the most sense from a tax planning perspective. Especially with Traditional IRAs, we need to be mindful of the tax implications involved in taking annual versus lump sum distributions.
3. Did the account holder die after their required beginning date to start taking Required Minimum Distributions (RMD)?
- If the account owner had reached their Required Beginning Date (RBD) to start taking Required Minimum Distributions before they died, the beneficiary will also be required to continue to take RMDs during the ten-year period.
- If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by December 31st of the year the original account holder died.
- If the account owner died before their RBD, then distributions are optional for the nine years after death.
- Be aware of year-of-death required distributions.
- Do not ignore beneficiary forms. All IRA accounts should have designated beneficiaries.
- The Required Beginning Date (RBD) is important. The RBD is April 1st of the year following the year the participant reaches their applicable RMD age. An account owner passing away before or after their RBD changes the timing of distributions within the ten-year liquidation period.
One last issue: What happens when someone inherits an inherited IRA? A “successor beneficiary” is someone who inherits a retirement account from the beneficiary of the original retirement account owner, also known as an “inherited inherited IRA.” The RBD occurs again because, if the original beneficiary was subject to the ten-year rule, then the successor beneficiary must take distributions within the same ten-year window. Whether or not annual distributions are required within this window will be based on the same rules listed above dependent on the original account owner’s death related to their RBD. If the original beneficiary was an eligible designated beneficiary and elected to use the life expectancy method for distribution, the successor beneficiary obtains a new ten-year distribution window.
The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
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