In January 2020, the SECURE Act went into effect, significantly changing the rules for retirement accounts. In January 2022, we got SECURE 2.0. Then, later in 2022, we got “proposed regulations” from the IRS contradicting parts of the original SECURE Act. More than four years after the original legislation, in July 2024, we got the final regulations clarifying the new rules.
The combination of the SECURE Act, SECURE 2.0 and the final regulations released in July creates a nearly impossible maze to navigate when it comes to distributions from inherited accounts. Before we look at these insanely complicated rules, we must define a few things.
Key definitions
Eligible designated beneficiary (EDB). In most cases, this will be the spouse inheriting the retirement account, but it’s not just spouses. According to the IRS, an eligible designated beneficiary is:
- A spouse or minor child of the deceased account holder
- A disabled or chronically ill individual
- An individual who is not more than 10 years younger than the IRA owner or plan participant
Non-eligible designated beneficiary (NEDB). If you are not an eligible designated beneficiary, you are an NEDB. This is most commonly adult children. The rules are more complicated for you.
Required beginning date (RBD). This is the age at which the original account owner must begin taking their own required minimum distributions (RMDs). This used to be 70.5 for everyone. However, SECURE and SECURE 2.0 introduced age brackets based on year of birth:
Inheriting IRAs: Four common scenarios
Below, we outline the most common scenarios we see with our clients. Please note: These are all for traditional IRAs. Roth accounts have their own rules.
1. Spouse inheriting an IRA before RMDs start for the original owner (this is the RBD) (EDB)
- Inherited IRA stretch. If you choose this option, you will have to start taking distributions by the later of December 31 of the year following the year of death, or December 31 of the year the owner would have hit their RBD. This option allows for small distributions over the rest of your life.
- Inherited IRA 10-year rule. The only thing the IRS cares about in this scenario is that the account is completely emptied by December 31, 10 years after the year of death. For example: The owner dies on January 15, 2020. The spouse must take all the money out by December 31, 2030.
- Spousal transfer. You move the money into your own IRA and treat it as your own. All the same rules apply as they would if it had always been your account.
2. Spouse inheriting an IRA after RBD (EDB)
- Spousal transfer. Almost exactly the same as the scenario above, except that you do have to take the RMD due for the year of death, for the original owner. For example: If the decedent had not taken their $40,000 RMD for the year they died, it is your responsibility to take it (I’m sure you were looking for another item to add to your to-do list …). Once that RMD is taken, the IRA is treated the same as the rest of your IRA account(s). This is an option only if you are the sole beneficiary.
- Inherited IRA stretch. You must still make sure that you take the owner’s year-of-death RMD, but in the following year you will calculate your annual RMD based on the IRS single-life expectancy table.
3. Adult child (NEDB)
- Before RBD. Money will be rolled into an inherited IRA. There is no annual RMD requirement except in the year of death. However, the entire balance must be distributed by December 31, 10 years after the year of death.
- After RBD. Money will be rolled into an inherited IRA. There is an annual RMD requirement in years one to nine, post-death. This amount is based on the IRS single-life expectancy table.
4. Disabled adult child (EDB)
Disabled adult children essentially follow the rules prior to the SECURE Act. They can stretch distributions over their life expectancy, using the IRS single-life tables.
The bigger picture: Tax planning
Hey, don’t shoot the messenger! I left out some of the even more complex rules around trust and successor beneficiaries that our firm is also tracking for our clients. There is a bit of silver lining here: The SECURE Act went into effect on January 1, 2020. However, these final regulations didn’t come out until July 2024. So, if you read one of the above scenarios and thought, “Uh-oh, I haven’t been taking distributions,” that’s OK. They were waived for 2020-2024. However, that 10-year clock is still ticking.
I must now zoom out to bigger-picture planning, as I often do. Much of the work and the pain of RMDs has to do with the associated tax bill. We project out RMDs in our planning software to see the tax trend and then use standalone tax planning software to do the actual calculations. This means that when there are legislative changes, the software needs to be updated. Be sure your planner has updated theirs. Also, be sure the inputs in the plan are correct, including the original owner’s DOB and DOD. Otherwise, your numbers will be wrong.
If you want to use a free version of our planning software, you can access it here.
