IRS Nixes 10 Year Stretch For Most Inherited IRAs

by Retirement Advisor | Oct 6, 2022 | Inherited IRA

A lot of inherited IRA owners are in for a surprise. In a switcheroo, the Treasury Department has reinstated annual required minimum distributions for most folks who’ve recently inherited Individual Retirement Accounts, according to proposed regulations released late last month that interpret the 2019 retirement law known as the SECURE Act. IRA experts are still pouring through the 275 pages. What we know so far is this: If you inherited a traditional IRA or 401(k) account in 2020 or later, watch out because the rules have changed—again.“The IRS is interpreting the SECURE Act’s 10-year rule differently than what everybody thought,” says Ed Slott, a CPA and IRA expert in Rockville Centre, N. Y. Under the new regulations, if you inherited a traditional IRA from someone who had already passed their required beginning date and had been taking out payments (required minimum distributions/RMDs), you can’t wait until year 10 to take out the money out. Instead, you have to take annual distributions in years 1 to 9 and the balance in year 10. That could wreak havoc on your taxes. Slott says he got a call from an advisor with a client who inherited a multimillion dollar IRA in 2020. Should the client go back now and take out a $250,000 payment for 2021 that he just found out this week he missed? Technically, yes, he had an RMD in 2021. RMDs for inheritors of traditional IRAs start the year after the IRA owner’s death. He should double up and take two payments in 2022 and file a Form 5329 to waive the 50% penalty. Or he could wait it out, and see if the final regulations include relief for people who inherited IRAs in 2020, Slott says. What if grandma died in 2021 and left an IRA to her daughter, age 60, and Roth IRAs to her grandkids? The daughter might have thought she could hold off on taking RMDs—and the tax bite that goes along with them—until she retired, but under the new rules, she’ll have to start taking RMDs this year—increasing her tax bill. The grandkids are luckier. Because Roth IRAs don’t have RMDs, the grandkids can keep their inherited Roth IRAs intact until year 10 when they have to take all the money out. The back story here is that it used to be that you could name a non-spouse beneficiary, say your daughter, to inherit your IRA, and when you died she could keep the IRA for her lifetime, taking required minimum payments set by the Internal Revenue Service each year. It was known as a stretch-IRA—payments could be stretched out for years. That tax-deferral over potentially decades was worth a lot. But the stretch was too good to be true. In the SECURE Act, Congress eliminated the stretch for inherited IRAs from deaths starting in 2020, as a revenue raiser: Payments from traditional IRAs are taxable income, so the Treasury would get its taxes sooner. Congress left the stretch rule in place for some special “eligible” beneficiaries—folks with disabilities or close in age to the decedent, for example.