FEDLIFE Podcast (Ep. 99): Understanding the New RMD Rules for Inherited IRAs: Your Essential Guide – Part I

Summary: In celebration of episode 100, we’re excited to bring you a brand new conversation that delves into a topic many federal employees overlook — the inheritance of an IRA from someone other than a spouse. Discover the intricacies and rules of non-spousal IRA inheritors while enhancing your understanding of IRA inheritance, its tax implications, and crucial considerations for beneficiaries in this week’s release of the FEDLIFE Podcast with Ed Zurndorfer and Dan Sipe.

Ed and Dan discuss:
• The evolution of IRA inheritance: Learn the modifications introduced by the Secure Act 1.0 in December 2019 and how these alterations transformed the IRA inheritance landscape
• The modified rules surrounding RMDs for non-spousal beneficiaries, including the time frame within which distributions must be made
• Year-of-death distribution and its significance for individuals who pass away after their required beginning date (RBD) for RMDs
• The definition of an eligible designated beneficiary and how it affects the options for taking distributions over a beneficiary’s lifetime, with a special focus on disabled beneficiaries
• The impact of the SECURE Act 2.0 on eligible designated beneficiaries (EDBs)
• What you should know about the 10-year payout period for non-eligible designated beneficiaries (NEDBs) and its implications
• And more!
Resources:
• “New RMD Rules for Non-Spousal Beneficiaries of Inherited IRAs (Part I)” by Ed Zurndorfer –
• FEDZONE –

Connect with Dan Sipe:
• Dan.sipe@stwserve.com
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• Facebook: Serving Those Who Serve
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Youtube: Serving Those Who Serve – youtube.com/fedlife…(read more)

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Understanding the New RMD Rules for Inherited IRAs: Your Essential Guide – Part I

If you have recently inherited an Individual retirement account (IRA) from a loved one, it is important to familiarize yourself with the new Required Minimum Distribution (RMD) rules. These rules underwent significant changes with the passage of the SECURE Act in December 2019. In this two-part guide, we will break down the new RMD rules to help you navigate through the complexities of inherited IRAs.

What is an Inherited IRA?

An Inherited IRA is a retirement account that is passed down to a beneficiary after the original IRA owner’s death. The beneficiary can be a spouse, child, or any other individual designated by the original account holder. Inherited IRAs offer unique tax advantages and allow beneficiaries to extend the tax-deferred growth potential of the account while taking distributions over their lifetime.

Understanding RMDs

Required Minimum Distributions (RMDs) refer to the minimum amount of money that the beneficiary of an inherited IRA is legally required to withdraw each year. These distributions are subject to taxes but can be stretched out over the beneficiary’s lifetime.

Prior to the SECURE Act, non-spouse beneficiaries could take distributions over their lifetime, allowing the account to grow tax-deferred for an extended period. However, with the new rules, most non-spouse beneficiaries must fully distribute the account within ten years of the original IRA owner’s death.

Eligible Designated Beneficiaries (EDBs)

There are exceptions to the new ten-year rule for certain beneficiaries known as Eligible Designated Beneficiaries (EDBs). EDBs include surviving spouses, minor children (until they reach the age of majority), disabled individuals, and chronically ill individuals. These beneficiaries can still stretch their distributions over their lifetime, preserving the tax-deferred growth potential of the Inherited IRA.

Required Beginning Date (RBD)

The RBD is the date by which RMDs must begin. For non-EDBs, the RBD is December 31st of the year following the original owner’s death. This means that if the original account owner passes away in 2021, non-EDBs must begin taking distributions by December 31, 2022.

Calculating the RMD: The Single Life Expectancy Table

When determining the annual RMD, non-EDBs must use the Single Life Expectancy Table provided by the IRS. The table incorporates the beneficiary’s age and uses a distribution period based on their life expectancy. Each year, as the beneficiary’s age increases, the divisor decreases, resulting in a higher distribution requirement.

The Impact of the New Rules

The new RMD rules have significant implications for beneficiaries of inherited IRAs. Non-EDBs can no longer take distributions over their lifetime, potentially accelerating their tax liability. In contrast, EDBs can still stretch distributions, but when the account is ultimately distributed, the ten-year rule will apply to subsequent beneficiaries.

In Part II of this guide, we will delve into additional considerations for inherited IRAs, including the importance of beneficiary designation and strategies to minimize taxes under the new RMD rules.

In conclusion, understanding the new RMD rules for inherited IRAs is crucial for anyone who has recently become a beneficiary. The SECURE Act has brought about significant changes, including the ten-year distribution requirement, which has profound implications for tax planning and wealth preservation.