This week we’re talking about the SECURE Act and how it changes the inherited IRA rules.

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The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act has brought significant changes to inherited individual retirement accounts (IRAs). In the past, heirs could stretch out required minimum distributions (RMDs) over their lifetime, which allowed the money to grow tax-deferred for a longer period. However, now, with the passage of the SECURE Act, non-spouse beneficiaries are required to withdraw the entire inherited IRA within ten years of the original owner’s death.

This provision of the SECURE Act, which took effect on January 1, 2020, has significant implications for those who have inherited IRAs or plan to pass them on to their heirs. Non-spouse heirs, such as children or grandchildren, will need to withdraw the entire IRA within ten years, instead of the lifetime stretch option. The ten-year rule applies to beneficiaries who inherit an IRA from someone who passes away after December 31, 2019.

The ten-year rule applies regardless of the beneficiary’s age or tax bracket. Depending on the beneficiary’s tax bracket and other assets, the requirement to withdraw the entire account in ten years could result in higher taxes. For example, if a beneficiary has a high income, the withdrawal of the inherited IRA could push them into a higher tax bracket.

However, the SECURE Act does not affect spousal beneficiaries who inherit an IRA. Spouses can still choose to keep the IRA in their own name, continue to make contributions, and take RMDs based on their life expectancy.

The SECURE Act also includes some favorable changes for retirement savers. It pushes the RMD age from 70 ½ to 72 and allows long-term, part-time employees to participate in 401(k) plans.

For those who have inherited IRAs, it’s essential to understand the new rules and plan accordingly. It may be beneficial to talk to a financial advisor or tax professional to understand the implications of the ten-year rule and develop an appropriate distribution strategy.

Overall, the SECURE Act’s passage has brought significant changes to inherited IRA rules, which could have significant impacts on the financial plans of those holding or inheriting IRAs. It’s crucial to stay informed and make the appropriate adjustments.