December 20, 2023

New Beneficiary IRA Distribution Requirements, #180

19 minutes

Did you inherit an IRA from a non-spouse on January 1, 2020 or later? Well a big change happened this summer that you should be aware of that could impact your 2023 tax season. On this episode, I'm unpacking the passing of and subsequent changes to the SECURE Act, how to best manage an inherited IRA in light of these changes, and how you can leave a legacy with a Roth account.

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

Unpacking the history of the SECURE Act [2:20]
Managing an inherited IRA [9:48]
Leaving a legacy with a Roth account [14:47]

Understanding the SECURE Act

The passing of the SECURE Act in January 2020 brought a significant shift in the landscape of inherited retirement accounts. This act, an abbreviation for "Setting Every Community Up for Retirement Enhancement," altered the rules for beneficiaries inheriting retirement accounts after the set date, restructuring the required minimum distribution (RMD) criteria. Previously, non-spousal living beneficiaries had three distribution options: taking a lump sum, emptying the account within five years of the owner's death, or taking annual lifetime distributions based on their age. However, the SECURE Act introduced changes for beneficiaries post-January 1, 2020. It classified beneficiaries into designated and non-designated categories, further distinguishing between eligible and non-eligible designated beneficiaries.

Eligible designated beneficiaries, including surviving spouses, disabled individuals, chronically ill persons, those within a 10-year age range of the deceased, and minor children, retained the option of lifetime distributions. Conversely, non-eligible designated beneficiaries inheriting traditional IRAs after January 1, 2020, lost the lifetime distribution choice. Instead, they must empty the account within 10 years of the original owner's death or face taxation. The complexity amplified with IRS proposed regulations in February 2021, creating subdivisions among non-eligible designated beneficiaries based on the original account owner's required minimum distribution age. Those inheriting from owners before this age had the liberty to wait until the 10th year to begin withdrawals, while those after the age were required yearly distributions from year one of the 10-year window.

Managing an inherited IRA

Managing an inherited IRA can be a complex yet crucial aspect of financial planning. If you've inherited a retirement account after the original owner reached the required minimum distribution age, understanding the process becomes essential. For instance, if you inherit a $300,000 IRA at 55 years old, determining your RMD involves dividing the previous year's balance by your factor from the life expectancy chart. This calculation mandates annual withdrawals, recalculated based on the prior year's balance and adjusted life expectancy factor.

However, strategic planning becomes pivotal in optimizing taxes on these withdrawals. Consulting a financial advisor or accountant becomes crucial to align these IRA distributions with your overall financial landscape, considering potential income sources, Social Security, pensions, capital gains, and future required minimum distributions from personal accounts.

Navigating an inherited IRA involves more than mere withdrawals; it's a balancing act between meeting RMDs and minimizing tax impact. Careful planning and leveraging available resources can optimize your inherited IRA management for long-term financial stability. Listen to this episode for more on new beneficiary IRA distribution requirements!

Resources Mentioned