The rules around inherited IRAs have changed. Learn planning strategies for you and your beneficiaries, that could help you save BIG on your taxes!

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Ashley Micciche, QPFC, CRPC
CEO, True North Retirement Advisors

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The SECURE Act, which was signed into law in December 2019, has major implications for those who have inherited individual retirement accounts (IRAs). The new law changes how inherited IRAs are taxed and brings an end to the popular “stretch IRA” strategy.

Under the old rules prior to the SECURE Act, if you inherited an IRA, you could stretch out the required minimum distributions (RMDs) over your lifetime, reducing the income tax you owe on the distributions. This allowed inherited IRAs to grow tax-free over many years, benefitting the heirs of the account.

However, the SECURE Act changes the rules for inherited IRAs. Now, most non-spouse beneficiaries must withdraw the entire balance of the inherited IRA within 10 years following the account owner’s death. This means that the tax liability will be greater and occur more quickly than under the old rules.

There are some exceptions to the new rule, including for spouses, minor children, disabled individuals, and those who are not more than 10 years younger than the deceased IRA owner.

Spouses are still able to roll over an inherited IRA into their own IRA, which would allow them to delay RMDs until they reach age 72. This also provides the spouse with more control over the inherited account, as they are able to name their own beneficiaries.

Another exception is for minor children of the deceased IRA owner. They may take RMDs based on their own life expectancy until they reach age 18, and then switch to 10-year withdrawals.

The SECURE Act also eliminates the age limit for making contributions to traditional IRAs, which was previously 70.5 years old. Now, anyone with earned income can contribute to a traditional IRA, as long as they meet the other eligibility requirements.

Additionally, the SECURE Act now requires employers to offer qualifying longevity annuity contracts (QLACs) in their retirement plans. These annuities allow retirees to defer part of their required distributions from their retirement plans until later in life, giving them protection against running out of money in their later years.

In summary, the SECURE Act has major implications for inherited IRAs, eliminating the stretch IRA strategy and requiring most non-spouse beneficiaries to withdraw the entire balance of the inherited IRA within 10 years. However, there are exceptions to the rule, and spouses are still able to roll over an inherited IRA into their own account. The new law also changes the age limit for making contributions to traditional IRAs and requires employers to offer QLACs in their retirement plans. It’s important to review your estate planning strategy in light of these changes and consult with a financial advisor to determine the best course of action for your situation.