New Regulations on Inherited IRAs
The SECURE Act of 2019 ushered in a new set of rules for traditional IRA beneficiaries, specifically non-spousal beneficiaries. In the SECURE Act, non-spousal designated beneficiaries that inherited a traditional IRA on or after January 1, 2020, no longer have the option to have a Stretch IRA. On February 28, 2022, the IRS released Publication 590-B, outlining new distribution rules for non-spousal designated beneficiaries.
If the original owner of the IRA died on or after starting RMDs (required minimum distributions), then the new owner that is a non-spousal designated beneficiary, must complete distributions within 10 years of the death of the owner. In addition to making sure the balance of the IRA is at $0 by the end of 10 years, the beneficiary will need to take RMDs based off their own life expectancy factor. See Example 1 for an illustrative approach:
Example 1: Your cousin, Jonathan, dies at age 74 in 2022 and you are the designated beneficiary of his traditional IRA. Since Jonathan was over 72, he was required to take RMDs. Starting in 2023, you must take a RMD based off your life expectancy factor from Table 1 (IRS Table of Single Life Expectancy Factors). At the end of 10 years, the remaining value after years 1-9 of RMDs of the IRA must be withdrawn.
If the original owner of the IRA died before starting RMDs, then the new owner that is a non-spousal designated beneficiary, must complete distributions within 10 years of the death of the owner. The beneficiary does not need to take any distributions before year 10, but they can if they want to. See Example 2 below for an illustrative approach:
Example 2: Your cousin, Jonathan, dies at age 42 in 2022 and you are the designated beneficiary of his traditional IRA. Since Jonathan was under 72, he was not required to take RMDs. You can choose to take distributions from the IRA in years 1-9 or leave in the IRA. At the end of 10 years, the remaining value of the IRA must be withdrawn.
Many non-spousal designated beneficiaries that should have taken RMDs in 2021 did not due to previous IRS guidance. At this time, the IRS has not issued a resolution to missed RMDs due to the delayed regulations. Many are hopeful the IRS will allow a grace period to catch up on missed RMDs and not be subject to the 50% failure to make a RMD penalty.
The rules on Inherited IRAs can be confusing. Should you have any questions or concerns, please do not hesitate to contact one of our trusted advisors.