21 Feb How the SECURE Act changed the inherited IRA

Q. What’s changed for withdrawals from inherited IRAs? What are the new rules, and what happens if you’ve already started to take withdrawals?
— Investor

A. You’re correct that there were big changes for how withdrawals from inherited IRAs are treated.

The changes come from legislation called the Setting Every Community Up for Retirement Enhancement — or the SECURE Act — which was passed in December 2019.

The new law effectively eliminates the so-called Stretch IRA for most beneficiaries, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said the new law affects IRA accounts where the original IRA account owner passes away in 2020 or after.

“Under the old rules, an individual was allowed to open an inherited IRA account and effectively take the IRA distributions over their lifetime,” Maye said. “Going forward under the new rules, most beneficiaries have to empty the account by the end of the tenth year following the year of inheritance.”

It does allow for some flexibility for the timing of the distributions because there is no Required Minimum Distribution (RMD) during the 10-year window.

Those who inherit the account can wait till the tenth year to take all the proceeds from the IRA they inherited, Maye said.

Under the new rules there are “eligible beneficiaries” for whom the new 10-year rule does not apply:

• Spousal beneficiaries;
• Disabled as defined by IRC Section 72(m)(7);
• Chronically ill as defined by IRC Section 7702B(c)(2);
• Individuals who are not more than 10 years younger than the decedent;
• Certain minor children of the decedent till they reach the age of majority.

For those beneficiaries, the old rules that allow you to stretch the distributions over your lifetime still apply, he said.

It’s important to note that minor children only get a temporary reprieve. Once they hit the age of majority, they will need to empty the account within 10 years, Maye said.

“For anyone where a trust is named as a beneficiary of an IRA, it is critical that they have their document reviewed by their estate planning attorney as the new rule might negatively impact their trust depending on the language,” he said.

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This story was originally published on Feb. 21, 2020.

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