Video: SECURE Act 2.0: Inheriting an IRA: What You Need to Know

SECURE Act 2.0: Inheriting an IRA: What You Need to Know

Video Transcript:

Have you recently inherited an IRA from a parent or someone other than your spouse?  Maybe you expect to in the future.  There have been some recent developments regarding the SECURE Act that you should be aware of.

The SECURE Act was signed into law in 2019, and SECURE 2.0 in December 2022.  The main purpose of these bills is to enhance income for retirees.  Today I am going to focus on how the SECURE Act changes the Required Minimum Distributions (RMDs) for non-spouse beneficiaries of retirement accounts.

Prior to 2020, a non-spouse beneficiary of a retirement account could elect to take distributions in the form of a lump sum, or empty the account within 5 years, or stretch the distributions over their life expectancy in the form of annual RMDs.  This came to be known as a “stretch” benefit since retirement accounts could be passed down and, the income from them, stretched over multiple generations.

SECURE Act 1.0 ended the stretch in most instances and now non-spouse beneficiaries are required to empty these accounts within 10 years of the decedent’s death.  To make things complicated, there is also an annual RMD required when a non-spouse beneficiary inherits a pre-tax retirement account and the decedent already started RMDs before passing away.  Please note, this nuance doesn’t apply to Roth IRAs and you still get tax-free distribution treatment on inherited Roth accounts.

FAQ

• I have just inherited an IRA from my mother. Should I draw more than the RMD each year or take more out during year 10?
  • The answer to this depends upon whether the account is a Traditional or Roth IRA, as well as what cash flow and taxes look like.
  • For a Roth IRA, I recommend delaying all of your distributions until year 10, unless you need money or can use the inherited Roth account to fund your own Roth IRA or make Roth contributions in your 401(k). This will enable you to maintain tax-free growth for as long as possible.
  • If this is a Traditional IRA, I recommend using distributions to balance your income out over the next 10 years. If you are going to retire in a couple years, it would probably benefit you to take larger distributions after you retire rather than evenly over the 10 years.

I recommend you consult a tax advisor regarding your specific circumstances and how the SECURE Act impacts you.  Please join us soon for the second installment of our three-part series on the SECURE Act.