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Tax and IRA expert Ed Slott discusses whether there’s any way to lessen the tax bill.

00:00 Introduction

00:17 Rules Regarding Inherited IRAs

9:19 How to Mitigate the Tax Impact of Required Minimum Distributions

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Inheriting an individual retirement account (IRA) can be a significant financial windfall, but it’s important to be aware of the new rules for inherited IRAs that have been implemented. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in December 2019, brought some major changes to the way inherited IRAs are treated.

One of the biggest changes under the SECURE Act is the elimination of the “stretch IRA” provision for most non-spouse beneficiaries. Under the previous rules, beneficiaries were able to stretch out the distributions from an inherited IRA over their lifetime, minimizing the tax burden and allowing the account to continue to grow tax-deferred for a longer period. However, under the new rules, most non-spouse beneficiaries are required to withdraw all the funds from the inherited IRA within 10 years of the original account owner’s death.

This change can have significant tax implications for beneficiaries, as the funds withdrawn from the inherited IRA will be subject to income tax at their ordinary income tax rate. It’s important to plan for these taxes and consider the impact on your overall financial situation.

There are a few exceptions to the 10-year rule for certain beneficiaries, including spouses, minor children, disabled or chronically ill individuals, and beneficiaries who are less than 10 years younger than the original account owner. These beneficiaries may still be able to stretch out the distributions from the inherited IRA over their lifetime, but it’s important to consult with a financial advisor or tax professional to determine the best strategy for maximizing the tax advantages.

Another important change under the SECURE Act is the increase in the age for required minimum distributions (RMDs) from retirement accounts. Under the previous rules, individuals were required to start taking RMDs from their retirement accounts at age 70 ½. However, under the new rules, the age for starting RMDs has been increased to 72. This change only applies to individuals who turn 70 ½ after December 31, 2019.

It’s important to stay informed about these new rules for inherited IRAs and how they may impact your financial planning. Consulting with a financial advisor or tax professional can help you navigate the changes and develop a strategy that aligns with your financial goals. Understanding the rules for inherited IRAs can help you make informed decisions about how to maximize the value of your inheritance and minimize the tax implications.