Are you an owner of an Inherited IRA account? Do you know the different rules about distributing the dollars in that account? In addition, the rules have changed with the passage of the SECURE Act in 2019. Are you grandfathered into the "old rules," or do the "new rules" apply?
Let's start with the most common scenario. If you are the beneficiary of your spouse's IRA, you can treat it as your own IRA and even combine it with your current IRA accounts.
- Annual required minimum distributions are based on your age and can be "stretched" over your lifetime. This is the simplest scenario. Combining the inherited account with your retirement account means that you can defer distributions until age 72, but also means that distributions before age 59 ½ will be penalized. If you are under the age of 59 ½ and need the income, you may opt to move the assets to an Inherited IRA account instead of combining them with your current IRA. There is no early withdrawal penalty for distributing funds from Inherited IRA accounts.
Maybe you are a child, sibling, or friend instead of the IRA account owner's spouse, otherwise known as a non-spouse beneficiary.
- Your share of the decedent's IRA is then transferred into an Inherited IRA. This account is separate from other retirement assets you may have and should not be commingled with other retirement savings. Most (not all) non-spouse beneficiaries are required to take distributions from the Inherited IRA. However, the amount and frequency of the distributions are based on when the original account holder passed away. For example, if the original account holder died on or before December 31, 2019, non-spouse beneficiaries are required to take annual distributions based on their life expectancy. This allows the beneficiary to stretch out distributions for the rest of their life.
- If the original account holder died after December 31, 2019, then the non-spouse beneficiary must distribute the account's balance within ten years of the account owner's death. Distributions can be made as frequently or infrequently as needed as long as the balance is zero at the end of year ten. You should also coordinate distributions with your tax planning. For example, if you know you will be in a lower tax bracket in a few years, it may be beneficial to delay distributions until that year.
There are a few exceptions to the ten-year distribution rule.
- Beneficiaries who are minors, disabled, chronically ill, or not more than ten years younger than the account holder may still be able to stretch out the distributions over their lives. If you think one of these definitions applies to you, you should talk with your financial planner or tax advisor to determine what distribution options are available.
When the SECURE Act first passed, the rules seemed straightforward. In practice, we are now encountering individuals who have more than one Inherited IRA account and possibly different distributions plans for each one. Again, the key is to know which rules apply to you.
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