In part one of this blog article series, we introduced the basics of IRAs and required minimum distributions (RMDs). Now, let’s dive deeper into how the SECURE Act of 2019 and the SECURE 2.0 Act of 2022 have changed the rules, specifically when it comes to inherited retirement accounts. While the following may sound complicated, we’re here to simplify it and help you navigate receiving a retirement account.
The 10-Year Rule: A Big Shift for Inherited IRAs
One of the key changes within the original SECURE Act, or version “1.0” that went into effect January 1, 2020, was the introduction of the 10-Year Rule for inherited retirement accounts for IRAs, 401(k)s, and the like. Before 2020, many beneficiaries could “stretch” the RMDs over their lifetime, reducing the tax burden any given year and keeping more money growing tax-deferred in the account. However, now most non-spouse beneficiaries must fully withdraw all funds within 10 years of the original owner’s death.
Unfortunately, it’s not as simple as taking out money whenever you want during that period. There are some complex rules that depend on whether the person you inherited the account from had already started taking RMDs. Other rules surrounding RMDs depend on which type of beneficiary you are.
Breaking Down the Rules: Eligible vs. Non-Eligible Beneficiaries
Under SECURE Act 2.0, beneficiaries are divided into two categories: Eligible Designated Beneficiaries (EDBs) and Non-Eligible Designated Beneficiaries (NEDBs). Here’s how the rules differ for each:
- Eligible Designated Beneficiaries (EDBs): These include spouses, minor children, disabled or chronically ill individuals, and beneficiaries less than 10 years younger than the deceased account owner. EDBs can still stretch their RMDs over their life expectancy, which could be a key tax advantage.
- Non-Eligible Designated Beneficiaries (NEDBs): Most beneficiaries, including adult children or non-spouse heirs, fall into this category. NEDBs must follow the 10-Year Rule, meaning the entire account must be emptied within 10 years. If the original account owner died after reaching their required beginning date (the age at which they were required to start taking RMDs, currently 73), then NEDBs will also have to take annual RMDs within the first nine years, plus empty the account by the end of year 10. Please note that NEDBs who inherit(ed) a retirement account from someone who died before their required beginning date only must empty the inherited retirement account by the end of the 10th year after the owner’s death.
Roth IRAs: A Hidden Benefit
One thing discussed in part one of this blog series was how Roth IRAs never have RMDs during your lifetime. The trick is that it applies to YOUR lifetime. Fortunately, spousal beneficiaries of a Roth IRA may elect to treat it as their own (if they were the sole beneficiary), therefore avoiding RMDs during their lifetime as well. They’re regulated by the same distribution rules as if the Roth IRA had been theirs originally; early withdrawal penalties may still apply.
Non-spousal beneficiaries of Roth IRAs can’t treat the accounts as their own. EDBs may choose either the life expectancy method or the 10-year method of distributions. NEDBs must follow the 10-year plan for distributions, but at least there are no RMDs for anyone from inherited Roth accounts in years 1-9 using the 10-year method.
Why These Changes Matter to You
The changes brought by the two SECURE Acts over the past five years forced many individuals and households to relearn the rules for inherited retirement accounts. These changes might impact your personal financial plan or, at a minimum, influence the conversation about income tax planning if you inherit a retirement account.
If you’re inheriting a retirement account, likely to pass one down, or have questions about handling your retirement savings we are here to help you. We’ll navigate these new rules together and ensure you’re getting the best possible outcome.