The New Rules for Inherited IRA’s.

The New Rules for Inherited IRAs

The rules regarding Inherited Individual Retirement Accounts (IRAs) have undergone significant changes. It is essential for beneficiaries to be aware of these new regulations and understand how they may impact their inherited retirement accounts. If you inherit IRA assets of an owner that passed away after 2020, or later, your options as a designated beneficiary has changed.

Elimination of the Stretch IRA

One of the most notable changes is the elimination of the "Stretch IRA" provisions for most non-spouse beneficiaries. Under the previous rules, non-spouse beneficiaries had the option to stretch the required minimum distributions (RMDs) over their lifetime, providing them with the potential for continued tax-deferred growth on the inherited funds. However, with the new rules, beneficiaries need to adhere to a stricter withdrawal schedule.

10-Year Rule

Under the new rules, most non-spouse beneficiaries are now required to withdraw the entire balance of an inherited IRA within ten years of the original account holder's death. This ten-year rule applies regardless of whether the account holds a traditional (pre-tax) IRA or a Roth IRA. It is important to note that this rule doesn't necessitate annual RMDs; rather, the entire balance must be distributed within the ten-year timeframe.

Exceptions to the 10-Year Rule

Certain beneficiaries are still eligible for the Stretch IRA provisions and are not subject to the ten-year rule. These exceptions include:
1. Spousal Beneficiaries: Surviving spouses can still treat inherited IRAs as their own, enabling them to delay required distributions until they reach the age of 72.

2. Disabled and Chronically Ill Individuals: Beneficiaries who qualify as disabled or chronically ill may continue to stretch the distributions over their lifetime.

3. Individuals Not More Than 10 Years Younger Than the Account Owner: If the beneficiary is not more than ten years younger than the original account holder, they can still utilize the stretch provisions. Ex. Mary turns 70 years old today. Any beneficiary who is is turning 60 today, and anyone who is older than 60 today could qualify as an Eligible Designated Beneficiary for Mary’s IRA. Even people who are older than Mary could qualify for the Stretch IRA on her IRA as they are “not more than 10 years younger” than her.

4. Minor Children: Minors who inherit IRAs can delay distributions until they reach the age of majority, at which point the ten-year rule will apply.

Tax Implications

While the new rules may necessitate larger withdrawals within a shorter timeframe, beneficiaries must also consider the associated tax implications. Withdrawals from traditional IRAs will generally be subject to income tax, whereas those from Roth IRAs are usually tax-free, assuming the Roth was held for at least five years.

Considering the tax-efficient nature of Roth IRAs, converting a traditional IRA to a Roth IRA during the original account holder's lifetime may be a prudent strategy to leave a tax-free inheritance for beneficiaries in light of the new rules.

Seeking Professional Guidance

Given the complexity of the new rules surrounding inherited IRAs, it is highly recommended that beneficiaries consult a qualified tax or financial advisor. These professionals can help beneficiaries navigate the various implications, develop tax-efficient distribution strategies, and make informed decisions based on their unique circumstances.

In conclusion, the new rules for inherited IRAs implemented as part of the Secure 2.0 Act of 2022 have eliminated the stretch provisions for most non-spouse beneficiaries and introduced the ten-year rule. Understanding these changes, as well as exploring exceptions and tax implications, is crucial for beneficiaries to effectively manage their inherited retirement accounts.

-Brian D. Muller, AAMS® Founder, Wealth Advisor

(Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial or investment advice. Momentous Wealth Advisors does not endorse or recommend any particular investment product or strategy mentioned in this article. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.)