Rule changes (again) for inherited IRA’s….(read more)

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IRS Changes Inherited IRA Rules – What You Need To Know

In December 2019, the Internal Revenue Service (IRS) introduced new regulations that significantly impact the way inherited Individual Retirement Accounts (IRAs) are handled. These rules, known as the Secure Act, aim to revamp retirement savings and cover many areas, including inherited IRAs.

If you are either an account holder of an inherited IRA or a potential beneficiary, it is important to understand these changes and how they may affect you. Here’s what you need to know:

1. Elimination of “Stretch IRAs”: Previously, beneficiaries of inherited IRAs could “stretch” the required minimum distributions (RMDs) over their lifetime. This allowed them to benefit from continued tax-deferred growth. However, under the new rules, most beneficiaries are now required to withdraw the entire balance within a 10-year period, starting the year after the original account holder’s death.

2. Exceptions to the 10-Year Rule: There are some exceptions to the 10-year withdrawal requirement. These include surviving spouses, individuals less than 10 years younger than the original account holder, minor children (until they reach the age of majority), disabled individuals, and chronically ill individuals. These beneficiaries can still utilize the stretch distribution method allowing them to avoid large tax liabilities in a single year.

3. Impact on Taxes: With a shorter distribution period, more significant taxable income might be incurred, potentially pushing beneficiaries into higher tax brackets. Therefore, it becomes crucial to consider the tax implications and plan accordingly. Consult with a financial advisor or tax professional to understand the best distribution strategies for your situation.

4. Strategies for Mitigating Taxes: To reduce tax expenses, beneficiaries may choose to spread out distributions over the 10-year period or consider making Roth conversions, which involve paying taxes on the inherited IRA upfront but enjoying tax-free growth over time. Again, it is essential to review these strategies with a qualified professional.

5. Estate Planning Considerations: The Secure Act affects estate planning strategies involving IRAs. The elimination of the stretch option may necessitate updates to estate plans. Review and revise beneficiary designations to align with your goals and the new rules.

6. Required Minimum Distributions Begin at a Later Age: Under the Secure Act, the age at which individuals must start taking RMDs from their traditional IRAs is raised from 70 ½ to 72. This change provides an additional opportunity for individuals to grow their retirement savings.

While the new rules present challenges, they also create opportunities for savvy retirement planners. With a carefully crafted distribution strategy, individuals can still maximize the benefits of inherited IRAs under the revised regulations.

It is advisable to seek professional advice to navigate these changes effectively. A knowledgeable financial advisor or tax professional can analyze your unique circumstances and help you make informed decisions that align with your financial goals while minimizing tax obligations.