It feels like yesterday the SECURE Act passed, changing the distribution requirements for the beneficiaries of Inherited IRAs. But the time has come when we are starting to see the ripple effects of these changes, specifically when it comes to inheriting these Inherited IRAs.
As a refresher, two of the most notable changes of the SECURE Act were the elimination of the "stretch" provision for non-eligible beneficiaries and the creation of the 10-year rule.
Eligible beneficiaries that can still stretch their required distributions over their lifetime include:
- The spouse of the decedent.
- Minor children of the decedent.
- A person less than ten years younger than the decedent.
- Disabled or chronically ill individuals.
If you don't fall into one of the above categories, you're likely considered a non-eligible beneficiary and face more complex distribution requirements.
Suppose the original owner died before their Required Beginning Date (the age Required Minimum Distributions commence). In that case, the beneficiary is subject to the 10-year rule, which means the entire account must be depleted within ten years of inheriting it. If the original account owner died after their Required Beginning Date, the beneficiary will be subject to the 10-year rule and the stretch provision.
In summary, beneficiaries' distribution rules largely depend on their relationship with the original owner and when the original owner died.
What happens if the beneficiary dies and there are still funds in the account? Before the SECURE Act, the successor beneficiary could continue taking distributions based on the previous beneficiary's life expectancy. This is no longer the case.
Example #1: Successor Beneficiary of a Pre-SECURE Act Designated Beneficiary
If Grandma died before 1/1/2020 and her adult son was the beneficiary of her IRA, he could stretch distributions out over his lifetime. Suppose he passes away, and his wife is the beneficiary. In that case, the wife has ten years to distribute the account, even though the original owner died before the SECURE Act became effective.
Example #2: Successor Beneficiary of a Post-SECURE Act Eligible Designated Beneficiary
Suppose Grandma (age 80) died after 1/1/2020, and her brother (age 75) was the beneficiary of her IRA. In that case, he is considered an eligible beneficiary (less than ten years younger than the owner) and can stretch distributions out over his lifetime. When the brother passes away, and his daughter is the beneficiary, she has ten years to distribute the account.
Example #3: Successor Beneficiary of a Post-SECURE Act Non-Eligible Designated Beneficiary
If Grandma died after 1/1/2020 and her adult son was the beneficiary of her IRA, he is considered an ineligible beneficiary and has ten years to distribute the account. However, if he passes away eight years into the 10-year window and his wife is the beneficiary, the wife only has two more years to deplete the account.
These are some of the most common scenarios when inheriting an Inherited IRA, but your situation might be unique. Your Bedel advisors are here to help decipher these rules and make sure you're meeting your distribution requirements in a tax-efficient way.
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The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through Bedel Financial Consulting, Inc. Advisory services are only offered where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
