Chief Executive Officer, Mark B. Murphy discusses new IRS regulations for Inherited IRAs.
The rules for Inherited IRAs are complex, and the variations are many. If you are named as the beneficiary in an estate, consult your estate or financial planner about these new regulations.

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In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed. Along with other retirement savings provisions, the act brought about significant changes to the rules governing inherited Individual Retirement Accounts (IRAs).

Under previous regulations, non-spousal beneficiaries (such as children or grandchildren) of an inherited IRA could “stretch” the distributions over their lifetime, allowing for potentially decades-long tax-deferred growth. However, the new regulations essentially eliminate the stretch IRA strategy.

Under the SECURE Act, non-spousal beneficiaries must now withdraw the entire inherited IRA balance within 10 years of the account owner’s death. This means that the money in the account must be distributed within 10 years, but the beneficiary has flexibility in terms of when and how much to withdraw each year.

While the new rules do not apply to spousal beneficiaries, they do impact most people leaving assets to their children or grandchildren. The change is intended to generate additional tax revenue to help defray the costs of implementing other retirement savings provisions in the SECURE Act.

However, there are a number of exceptions to the 10-year rule. Eligible designated beneficiaries, which include spouses, disabled individuals, those with chronic illnesses, and beneficiaries who are not more than 10 years younger than the account owner, are allowed to take distributions over their lifetime.

Additionally, the new rules only apply to IRAs inherited after December 31, 2019. If an account owner passed away prior to that date, the old stretch IRA rules still apply.

For those who have already set up trusts to receive IRA distributions, it is important to review them in light of the new regulations. Some trusts may no longer operate as intended, potentially causing adverse tax consequences for the beneficiaries.

Overall, the new regulations will likely change how many people plan for and distribute their retirement savings to their heirs. It is important to review your own situation with a qualified financial advisor to ensure you are taking advantage of the most advantageous strategies available to you under the new rules.