Back in December we wrote an article about Inherited IRAs and how they must be treated and distributed. As is the author’s curse, a month later Congress changed the rules as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Under this Act, no changes were made to the distribution rules if the person you inherited the account from died prior to January 1, 2020. The new rules only apply if the person died after that date.
Note: Due to COVID-19, all Required Minimum Distributions have been suspended for the remainder of 2020. If you already received an RMD from a retirement account, you can roll it back into your account before August 31, 2020.
Under the SECURE Act, a non-spouse beneficiary of an IRA must now directly roll over the assets to an Inherited IRA and will need to withdraw all assets from the inherited IRA by the end of the 10th year after the year of death. For example, a beneficiary who inherits an IRA during 2020 would have 10 years to distribute the balance of their inherited account beginning on January 1, 2021 (the year after the year of death) and ending on December 31, 2030. If the original account was a 401(k) or 403(b), the beneficiary can leave the assets in the plan (if the plan allows it) or roll them into an inherited IRA. Regardless of which scenario the beneficiary chooses, the same 10-year distribution rule will apply.
Forcing distributions to occur in a 10-year window means inheritors will need to carefully plan their distributions. If you wait until the deadline to distribute the full account, it is possible the distribution could be substantial and push you into a higher income tax bracket, resulting in even more taxes being owed. You should consult with your tax professional about distribution timing and amounts.
Exceptions to the 10-year distribution requirement apply to assets left to an eligible designated beneficiary. Eligible designated beneficiaries are those who have a disability or chronic illness, those not more than 10 years younger than the decedent, or minor children of the decedent. These beneficiaries have the option to take Required Minimum Distributions based on their life expectancy.
When an individual inherits an IRA from a spouse, they can roll the assets into an IRA in their own name or transfer the assets into an Inherited IRA. If the surviving spouse chooses to roll over the assets into their own IRA, then they would follow the regular RMD rules for their own IRA. These rules require RMDs begin once they reach age 72. If the surviving spouse chooses to transfer the assets into an Inherited IRA, the timing of the initial distribution will be based on the decedent’s age at the time of his or her death. If the decedent was older than age 72, the surviving spouse must begin taking RMDs by December 31 of the year following the decedent’s death. If the IRA owner was younger than age 72 at death, the surviving spouse may be able to delay RMDs until the decedent would have turned 72.
If a spouse inherits a 401(k) or 403(b), they can keep the assets in the 401(k) plan (if the plan allows it). If the spouse is still working, they may be able to roll the 401(k) into their own company’s 401(k) if their company plan permits rollovers. As a final option, they can roll over the inherited 401(k) to their own IRA or an Inherited IRA. Distributions would then follow the same RMD rules as if the spouse inherited an IRA.
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at email@example.com.
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