What happens to inherited IRAs under the SECURE Act?

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Q. What happens when current beneficiaries of inherited IRAs pass away? Does this trigger the 10-year draw down window from the new SECURE Act? The relatively young beneficiary is taking only the RMDs from the inherited account with the spouse listed as primary beneficiary.
— Confused

A. The SECURE Act has sparked many questions about what happens with IRAs in the future.

Let’s go over what’s changed.

Prior to Jan. 1, 2020. when a beneficiary of an inherited IRA passed away, the successor beneficiary would “step into the shoes” of the current beneficiary and continue the Required Minimum Distributions (RMD) based on the life expectancy of the current beneficiary, said Patricia Daquila, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

The SECURE Act changed that.

Daquila said the SECURE Act changed the ability to “stretch out” IRA distributions over the life of a younger beneficiary. It will go into effect for beneficiaries who inherit an IRA after Jan. 1, 2020.

However, if you are currently taking distributions on an IRA that was inherited prior to Jan. 1, 2020, then you will continue to take those distributions over your life expectancy under the “old” RMD rules. You are grandfathered into the previous regulations, she said.

When an IRA owner dies after Jan. 1, 2020 a beneficiary inherits their IRA, now the beneficiary must take distributions over the next 10 years following the decedent’s date of death, she said.

There are five exceptions for beneficiaries who fall into these groups: surviving spouse of the participant; minor child of the participant; disabled beneficiary; chronically ill individual, or; an individual who is less than 10 years younger than the decedent.

“The five eligible designated beneficiaries are not subject to the 10-year rule,” she said. “If you do not qualify in one of those five mentioned eligible designated beneficiaries, then the entire balance would need to be distributed by Dec. 31 of the year that contains the tenth anniversary of the date of death.”

Directly to your question: If the IRA is already an inherited IRA and the owner of that inherited IRA dies, then it appears that under the SECURE Act, the successor beneficiary would need to take the remaining balance of that inherited IRA over the next ten years even if the successor beneficiary is a spouse, Daquila said.

But importantly, she notes, because the SECURE Act was just passed in December 2019, the guidance from the IRS is not yet clear so what happens to these IRAs could change.

Stay tuned.

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This story was originally published on Jan. 31, 2020.

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