Inherited IRA rules are messy and complex. But if your loved one passed away BEFORE 1/1/2020 and the SECURE Act, this video will help explain your next steps. Each detail, from RMDs to taxation, is important and has unique planning opportunities.

CHAPTERS :
1:26 What is the SECURE Act?
2:36 What type of account is it?
3:29 What can you do with the money?
5:29 When do you have to take RMDs?
8:26 What are the tax implications of a full distribution?
9:23 What if there are multiple beneficiaries?
10:55 What are the opportunities for strategy?

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Inherited IRA Distributions: Pre SECURE ACT

An individual retirement account (IRA) is a tax-advantaged savings account designed to help individuals save for retirement. It allows account owners to contribute pre-tax dollars annually, and the earnings on the contributions grow tax-free until the funds are withdrawn. After retirement, IRA owners are required by law to begin taking minimum annual distributions to avoid penalties.

When an IRA owner passes away, the IRA is typically passed down to the beneficiary designated in the account’s beneficiary form. This beneficiary can be a spouse, child, or other individual designated by the owner. At the time of the owner’s death, the beneficiary becomes the owner of the IRA. This type of IRA is called an Inherited IRA.

Before the passage of the SECURE Act in December 2019, Inherited IRA beneficiaries were allowed to take distributions over their lifetime. The amount of the required minimum distribution (RMD) was calculated based on the beneficiary’s life expectancy and the IRA’s balance. This allowed Inherited IRAs to grow tax-free for many years, as long as distributions were taken annually.

One common strategy for Inherited IRAs was to stretch out the distributions over the beneficiary’s life expectancy. This allowed the beneficiary to take small distributions each year and avoid taking a large tax hit in one year. The account could continue to grow, potentially generating significant tax savings over time.

However, the SECURE Act changed the rules for Inherited IRAs. Beginning in 2020, most beneficiaries are required to withdraw the entire balance of an Inherited IRA within 10 years of the original account owner’s death. This means that Inherited IRAs will likely be taxed at higher rates than before.

There are some exceptions to the SECURE Act’s 10-year rule, including for surviving spouses and minor children. Surviving spouses can still take distributions over their lifetimes, as can minor children. However, once a child reaches the age of majority, the 10-year rule kicks in.

In summary, Inherited IRA distributions were more flexible prior to the SECURE Act. Beneficiaries were allowed to take distributions over their lifetimes, potentially generating significant tax savings over time. However, the SECURE Act changed the rules for Inherited IRAs, requiring most beneficiaries to withdraw the entire balance within 10 years. This means that Inherited IRAs will likely be taxed at higher rates than before.