For some time, there have been lawmakers who have expressed their displeasure with the so-called stretch IRAs.These IRAs have permitted certain beneficiaries, such as a young child or a grandchild, to use the Inherited IRA RMD rules to extend the payout period for decades.
When someone inherits an IRA or retirement plan, with the exception of a Roth IRA, the distributions from the retirement plan are generally taxable to the beneficiary. In the past, beneficiaries have often been able to use the Inherited IRA RMD rules to stretch the payments over a long period of time, allowing the account to grow with deferred earnings and reducing the overall taxes on the distribution. If the beneficiary is the decedent’s spouse, the spouse has special options for a lifetime payout or the ability to treat the plan as their own plan and defer distributions until they reach the age when distributions are required to begin*.
With the passage of the SECURE Act, and for distributions from retirement plans or IRAs of individuals dying in 2020 or later, the ability to use the old Inherited IRA RMD rules for some beneficiaries to stretch the distributions has been eliminated and replaced with a requirement to withdraw all the funds by the end of a 10-year period beginning the year after the plan owner’s death. This will require careful planning to mitigate the taxes on the distribution. Consideration should be given as to whether the beneficiary should wait until the end of the 10 years to withdraw the funds, take one-tenth of the account each year, or adjust annual distributions to match fluctuations of their other income? Each person’s situation is different and requires careful analysis to determine the best payout option for them.
Exceptions to the 10-year distribution period
Surviving Spouse – In the case of the spouse of the decedent, he or she continues to have the options to treat the plan as if it were theirs and defer distributions until the surviving spouse reaches the required distribution age, take distributions over their lifetime, or take the distributions within 10 years of the decedent’s date of death.
Minor Child – When a minor child is the beneficiary of the deceased’s retirement plan or IRA, the entire account must be distributed within 10 years after the year the child reaches the age of majority. In the U.S., the age at which a child reaches majority (i.e., is considered an adult) is determined by state by state, with age 18 being the most common.
Individual Less than 10 Years Younger, Disabled or Chronically Ill – For any individual beneficiary who is not more than 10 years younger than the deceased (for example, a sibling or a friend) or is disabled or chronically ill, the retirement plan or IRA account balance generally may be distributed over the life expectancy of the beneficiary, beginning in the year following the year of death of the deceased retirement plan or IRA owner.
To ensure your IRA will pass to your chosen beneficiary or beneficiaries, you should review your beneficiary designation form on file with your IRA custodian to determine it reflects your wishes. These forms permit you to designate both primary and alternate individual beneficiaries. If there is no beneficiary form on file, the custodian’s default policy will decide whether the IRA will go first to a living person or to your estate.
Call the tax professionals at East Coast Tax Consulting Group if you have questions about the new Inherited IRA RMD retirement rules.