Navigating “Inherited Inherited IRAs” after the SECURE Act: What You Need to Know
Introduction:
When planning for retirement, Individual Retirement Accounts (IRAs) are a valuable asset. But what happens when the IRA owner passes away and the account transfers to a beneficiary? In this blog post, we explore the concept of "Inherited Inherited IRAs" and the impact of the SECURE Act of 2019 on this situation, which recently came up in conversation with a client who was inheriting an IRA that had already been inherited by his late family member. Read on to learn more about these changes and what they may mean for your financial future.
Understanding “Inherited Inherited IRAs”:
Inherited Inherited IRAs arise when a beneficiary inherits an IRA and then, upon their own passing prior to liquidating the account, transfers it to another designated beneficiary. The SECURE Act, signed into law in December 2019, brought significant changes to retirement accounts, particularly the Required Minimum Distributions (RMDs) for beneficiaries. Let's delve into the impact of these changes on successive inheritances.
The SECURE Act and its Impact:
The SECURE Act eliminated the "stretch" provision for many non-spouse beneficiaries, which previously allowed distributions to be taken over the beneficiary’s lifetime. Instead, most beneficiaries are now required to deplete the IRA within 10 years. This change has implications for Successor Beneficiaries inheriting Inherited IRAs.
Who are Successor Beneficiaries?
Successor Beneficiaries are individuals who inherit an Inherited IRA after the initial beneficiary's death. The rules for Successor Beneficiaries vary based on two main factors: when the original IRA owner passed away and whether the initial beneficiary was an "Eligible Designated Beneficiary" or a "Non-Eligible Designated Beneficiary."
Eligible Designated Beneficiary vs. Non-Eligible Designated Beneficiary:
An "Eligible Designated Beneficiary" includes:
- The spouse of the decedent.
- A minor child of the decedent.
- An individual not more than 10 years younger than the decedent.
- A disabled or chronically ill individual.
A "Non-Eligible Designated Beneficiary" does not fall into any of the above categories.
If the original IRA owner passed away before January 1, 2020 (before the SECURE Act took effect), the Successor Beneficiary is subject to the 10-year rule. They must withdraw the entire balance of the Inherited IRA within 10 years after inheriting the account.
If the original IRA owner passed away on or after January 1, 2020, and the initial beneficiary was an Eligible Designated Beneficiary, then the distribution rules are the same as the scenario above. The Successor Beneficiary must withdraw the entire balance within 10 years after inheriting the account.
If, however, the original IRA owner passed away on or after January 1, 2020, and the initial beneficiary was a Non-Eligible Designated Beneficiary, the Successor Beneficiary must continue with the current 10-year timeframe already in place for the previous beneficiary. For example, if the previous beneficiary inherited the account six years prior (with four years left within the 10-year timeframe), the Successor Beneficiary must withdraw the remaining balance within four years.
Conclusion:
The SECURE Act has introduced significant changes to the distribution rules for inherited retirement accounts, including Inherited Inherited IRAs. As a beneficiary or potential Successor Beneficiary, it's essential to be aware of these changes and their impact on your financial planning. Consulting a financial advisor or tax professional can help you navigate the complexities and make informed decisions about your inherited retirement account.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
