Jerry Citarella updates us on how the Secure Act impacted Inherited IRAs.

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Late last year, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed by the US government, bringing about significant changes to the way Inherited IRAs are treated. These changes have important implications for people who are preparing to receive or have already inherited an IRA from a loved one.

The SECURE Act, which went into effect on January 1, 2020, contains several provisions that impact Inherited IRAs. One of the most significant changes is the elimination of the “stretch” IRA. Under the old rules, non-spouse beneficiaries could take required minimum distributions (RMDs) over their lifetime, spreading out the tax burden and allowing the IRA to grow tax-free for many years. However, the new law requires most non-spouse beneficiaries to liquidate the IRA within 10 years of the original owner’s death.

The only exceptions to this rule are certain eligible designated beneficiaries (EDBs), which include surviving spouses, minor children, disabled individuals, chronically ill individuals, and beneficiaries who are not more than 10 years younger than the IRA owner. For these individuals, the old stretch IRA rules still apply, and they can take distributions over their lifetime.

For those who are not EDBs, the new 10-year rule means that they will have to take larger distributions than before, potentially pushing them into higher tax brackets. It’s also worth noting that the 10-year clock starts ticking from the year after the owner’s death, so beneficiaries who inherit an IRA in 2021, for example, would have until the end of 2030 to distribute the funds.

Another change introduced by the SECURE Act is that the age at which IRA owners must start taking RMDs has increased from 70 ½ to 72. This means that people who are still working and contributing to their IRAs will have more time to let their money grow tax-free.

The new law also allows long-term, part-time employees to participate in employer-sponsored retirement plans, which could be of particular benefit to people who work for smaller companies that previously didn’t offer retirement benefits.

So, what does all of this mean for people who are inheriting an IRA? For EDBs, the impact of the SECURE Act is relatively minor, as they can still take distributions over their lifetime. However, for non-EDBs, the new 10-year rule means that they will have to carefully consider their tax situation and work with a financial advisor to develop a distribution strategy that minimizes the amount of taxes they’ll owe.

Inherited IRAs can be a valuable source of retirement income, but they can also be complex and subject to a lot of rules and regulations. As such, it’s critical to work with an experienced financial advisor who can help you navigate the inheritance process and develop a plan that makes sense for your situation. By taking the time to understand how the SECURE Act affects your Inherited IRA, you can make informed decisions that will help you maximize your retirement savings and minimize your tax burden.