Have you inherited an IRA from a non-spouse who passed away after 1/1/2020? Beneficiaries of pre-tax retirement accounts have always had to pay taxes on what they inherit. However, on 1/1/2020, the SECURE Act was passed, changing the annual amount that beneficiaries would have to withdraw. Beforehand, non-spousal beneficiaries could:

1. Cash out the account in one lump sum and pay taxes on that amount
2. Take the account out over five years and pay taxes on it
3. Take distributions the year after the account owner passed away and take withdrawals over their lifetime (a stretch IRA)

Most non-spousal beneficiaries must empty their inherited account within 10 years following the original owner's death (there are some exceptions for someone who is disabled, the chronically ill, those who are within 10 years of age of the deceased, and minor children).

Unfortunately, the IRS made some changes. Learn what it is—and if it impacts you—in this episode of Retire with Ryan.

You will want to hear this episode if you are interested in...

• [1:50] My on-demand Retirement Readiness Review Course
• [2:16] What's new with inherited IRAs?
• [5:56] The IRS announcement about required minimum distributions
• [9:32] The IRS changed the penalty for missing IRA distributions
• [10:07] IRS Notice 2044-25: The RMD for 2024 is being waived
• [11:13] What should you do with this information?
• [13:04] What if you inherited a Roth IRA?

The IRS announcement about required minimum distributions (RMDs)

Everyone thought that non-eligible beneficiaries who opted for the 10-year window could choose how to withdraw the funds (as long as the account was emptied). We thought that you could minimize distributions in years where their income was higher and take higher distributions when their income was lower, choosing when to pay taxes on the account (and avoiding being in a higher tax bracket).

Unfortunately, in February 2022, the IRS issued regulations to reflect the changes in the SECURE Act. They divided non-eligible beneficiaries into two groups:

1. People who inherited an account from someone who passed away before they reached their RMD age.
2. Someone who passed away after they reached their RMD age.

If you inherit an IRA from someone who hadn't yet reached their RMD age could wait until the 10th year to take distributions. However, if the person died after they'd started taking RMDs, the beneficiary would have to take distributions out every year (continuing the distributions of the original owner).

Thankfully, the IRS extended some relief and said if you were supposed to take RMDs in 2021–2024, the requirement would be waived.

The IRS also changed the penalty for missing IRA distributions from 50% and reduced it to 25%. If you missed a year where you were supposed to take it—as long as you make up the difference in two years—the penalty would be reduced to 10%.

What should you do with this information?

It's time to do some tax projections of your future income. If you've inherited a retirement account, you must deplete it in the next 10 years. If you anticipate being in a higher tax bracket in the future, it may make more sense to take a distribution this year in a lower tax bracket.

If you inherited an IRA in 2020, you still have seven years left to empty the account. How will it impact your taxes? Where will a distribution land you on the tax bracket scale?

What if you inherited a Roth IRA? Listen to hear how required minimum distributions work for an inherited Roth IRA!

Resources Mentioned

• Retirement Readiness Review
• Subscribe to the Retire with Ryan YouTube Channel
• New Beneficiary IRA Distribution Requirements, #180

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