Got an IRA?
Beneficiaries may
Still have RMDs

The IRS has given us some interesting news recently.

When Congress passed the SECURE Act in 2019 (it went into effect January 1, 2020), the rules around Inherited IRAs changed dramatically. Now that the law has been in place for two plus years, we have some clarity on how the new rules work.

Prior to the SECURE Act, a person who inherited an IRA could take required minimum distributions (RMDs) from their inherited account over the rest of his or her life. The beneficiary would get an RMD schedule based on his or her life expectancy, and the annual required distributions would be a very small taxable slice of the overall IRA. This was called the Stretch IRA (even though no such account registration actually existed – it was just an Inherited IRA with small annual RMDs).

In case you haven’t heard, the United States has a debt problem, which creates a tax revenue problem.

Many of the new tax law proposals involve increasing tax revenue in some way. The SECURE Act had this in mind, too. Now, unless you are a spouse, or less than 10 years younger than the original account owner, or disabled, or a minor, you are considered a Non-Eligible Designated Beneficiary.

Not eligible for what? The Stretch. Now you are required to fully liquidate the account within 10 years of inheriting it. This accelerates tax revenue for the government.

What was not clear when the SECURE Act came out was whether or not RMDs would be required in addition to the full account liquidation. Now we have some clarity.

The IRS has ruled that, if the original account owner had already started RMDs by the time they passed away, the beneficiary must take RMDs in addition to liquidating the account in 10 years. (Please click the link to read Ed Slott’s excellent summary). This prevents someone from waiting 10 years to let the account grow tax-deferred, then withdrawing the whole amount as one big lump.

However, if the original account had not started RMDs, then the beneficiary of the account does not need to take RMDs. But the account still must be liquidated within 10 years following the year after death.

This new nuance does not apply to Roth IRAs. The original owner of a Roth IRA will never have RMDs on that account. Therefore they will not have started RMDs at death, and any beneficiaries will be able to hold the account for 10 years following the year of death without making a single distribution. But the account will still need to be liquidated once that 10 year clock strikes midnight.

Questions? We’re here to help.