Inherited an IRA? Four Things Every Beneficiary Should Know

Inherited IRA beneficiaries should be aware of several important tax considerations — especially considering recent rule changes and delays involving required minimum distributions (RMDs).

Here are a few tax things every IRA beneficiary should know.

New Legislation

1. Inherited IRA distribution rules have changed.

If you have inherited an IRA or have any other retirement plan account, it’s important to be aware of the SECURE 2.0 Act. SECURE 2.0, effective last year, is major legislation that has significantly changed U.S. retirement account rules. These changes directly impact retirement savings plans, including 401(k), 403(b), IRA, Roth accounts, and, in some cases, associated tax benefits.

For example, the minimum age for required minimum distribution (RMD) was raised to 73 this year under the SECURE 2.0 Act. (Eventually, the RMD age will move to 75.)

Additionally, the SECURE Act of 2019 (which served as a basis for SECURE 2.0) has resulted in many beneficiaries being unable to extend inherited IRA distributions throughout their lifetimes. (More on that below.)

IRS 10-Year Rule

2. No more ‘stretch IRA’ strategy for many beneficiaries

Before SECURE 2.0, beneficiaries could use a “stretch” strategy with inherited IRA distributions, potentially allowing for tax-deferred growth over a more extended period. However, a “10-year rule” now applies to many beneficiaries of inherited IRAs.

• Due to the SECURE Act of 2019, most beneficiaries can no longer “stretch” distributions over their lifetimes. Instead, many non-spouse beneficiaries who inherited IRAs on or after Jan. 1, 2020, must empty the account within 10 years of the account owner’s death.
• The inherited IRA “10-year rule” has raised concerns about annual RMDs for unsuspecting beneficiaries.

But remember that individual circumstances vary, so consult with a trusted tax advisor to determine how to time your distributions strategically while complying with the 10-year rule if it applies to you. And keep in mind that the IRS has delayed some rules and penalties for certain inherited IRAs.

IRA RMDs

3. Inherited IRA RMD rules are delayed

Understanding the tax treatment of distributions and inherited IRA RMD rules is crucial for IRA beneficiaries.

• Inherited IRAs are generally subject to required minimum distributions. Rules vary when the beneficiary qualifies as an “eligible designated beneficiary” (e.g., surviving spouses, minor children, disabled individuals, and individuals who are chronically ill).
• RMD rules, including timing and amounts, for inherited IRAs are largely tied to the date of the original account holder’s death.

It’s important to note that the IRS recently delayed the final rules governing inherited IRA RMDs — to 2024. This means some beneficiaries of inherited IRAs have more time to adapt to distribution requirements.

The IRS will waive penalties for RMDs missed in 2023 from IRAs inherited in 2022, where the deceased owner was already subject to RMDs. (With previous IRS relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, and 2022.)

The agency also extended the 60-day rollover of certain plan distributions to Sept. 30, 2023. This means more time to roll over distributions from earlier this year that were mischaracterized as RMDs. (If you were born in 1951 and received or will receive a distribution this year before July 31, 2023, you have until the end of this month to roll those distributions over.)

However, given all the changes and confusion, it’s a good idea for inherited IRA beneficiaries to consult a tax adviser to determine the correct RMD schedule.

4. New inherited IRA rules: Individual details matter

With inherited IRAs, the type of account and specifics involving the account holder and the beneficiary matter when determining tax liability and strategy. If you’ve inherited an IRA, knowing these details can help you plan for distributions’ tax consequences and choose the best strategy for your situation.

•  Consult a qualified tax advisor or financial planner to navigate the specific inherited IRA rules and tax implications.

Inheritance and tax laws can be complex, and individual circumstances vary, so seeking professional guidance can help beneficiaries make informed decisions.

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