How fast do we have to empty out this inherited IRA?


Q. If the person with an inherited IRA dies within 10 years of receiving it and hasn’t exhausted the funds, what rules apply to the next beneficiary? I assume the second beneficiary must withdraw the funds in the next 10 years.
— Beneficiaries

A. You are basically correct.

But as is so often the case with tax law, the answer to your question depends on the timing and on the circumstances.

Let’s first go through the rules.

In December 2019, the SECURE Act became law and made major changes to the rules that govern inherited retirement accounts, such as IRAs and 401(k) accounts, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

He said one of the biggest changes under the law eliminated the so-called “stretch” IRA for non-spouse beneficiaries and replaced it with a new, 10-year rule.

“Under the 10-year rule, if a retirement account owner dies in 2020 or later years, a non-spouse beneficiary who inherits that account must withdraw all the funds by the end of the tenth year following the original account owner’s year of death,” McGovern said.

He said the new rules don’t require annual distributions, or any distributions at all, within the 10-year period. That means a non-spouse beneficiary can choose to wait until the 10 years have passed or can take distributions of any amount in any year along the way.

“Under the old rules, both spouses and non-spouse beneficiaries who inherited a retirement account could stretch out the Required Minimum Distributions, called RMDs for short, over their remaining lifetimes,” he said. “This allowed the beneficiary to take advantage of tax-deferred growth in the retirement account over many years, well past the lifetime of the original account owner.”

A spouse beneficiary, unlike a non-spouse beneficiary, can continue to use the old, pre-SECURE Act rules, either stretching out the RMDs from the account over his or her remaining lifetime or, alternatively, rolling over the inherited IRA into their own IRA instead, McGovern said.

As of 2020, most holders of inherited retirement accounts, whether spouses or non-spouses, will have received those accounts from owners who died in 2019 and previous years, he said. The old rules apply to all of them, and all are entitled to stretch out their distributions under the old rules, McGovern said.

But going forward, spouses who inherit a retirement account from someone who dies in 2020 or later years can continue to use the old “stretch” RMD rules, while non-spouses must empty the account after 10 years, he said.

Now to your question: What happens when a retirement account beneficiary who’s been taking distributions dies with funds remaining in the account and someone else inherits the remaining funds in the account?

That second inheritor, the beneficiary of the first inheritor, is referred to as a successor beneficiary, McGovern said.

The short answer to your question is that the rules for a successor beneficiary depend on which rules applied to the original beneficiary.

McGovern broke it down with a couple of cases that distinguish between a retirement account owner who died before and after 2020.

Case 1: If the original account owner died before 2020, both spouses and non-spouses who inherited the retirement account could stretch out the RMDs over their remaining lifetime.

A successor beneficiary in 2020 who inherits from anyone who was stretching out the RMDs under the old rules is subject to the new 10-year rule, he said.

For example, assume that Alice inherited a traditional IRA account worth $100,000 when her husband George died in 2007. Alice was stretching out the RMDs over her lifetime when she died on March 1, 2020. Alice’s beneficiary is her daughter Megan. As a successor beneficiary, Megan is subject to the 10-year rule, McGovern said.

The 10-year clock for Megan begins on January 1, 2021, which is the year after the year of Alice’s death. Megan must withdraw the balance of the inherited IRA account no later than Dec. 31, 2030, the end of the 10th year, he said.

Case 2: If the original retirement account owner dies in 2020 or later, a spouse who inherits can still stretch out the RMDs over his or her lifetime, but a non-spouse is subject to the 10-year rule.

If a successor beneficiary inherits from a spouse who was stretching out the RMDs, that person is subject to the 10-year rule, just as Megan was in Case 1, McGovern said.

However, if the successor beneficiary inherits from a non-spouse beneficiary who is already subject to the 10-year rule, the 10-year clock does not get reset. Instead, the successor beneficiary must withdraw all funds from the account at the end of the original 10-year period he said.

Here’s an example: Assume that Robert inherited an IRA account from his brother in March 2020. As a non-spouse beneficiary, Robert is subject to the 10-year rule. Four years later, in 2024, Robert dies. His successor beneficiary is his wife Dina. As the successor beneficiary, Dina does not get a new 10-year period. Instead, she must withdraw all funds from the account by the end of Robert’s original 10-year period — by Dec. 31, 2030. Dina effectively steps into Robert’s shoes.

“To put it another way, any successor beneficiary of a beneficiary who was taking RMDs using the stretch method, whether spouse or non-spouse, is subject to the new 10-year rule,” McGovern said. “That’s true whether the first beneficiary inherited before or after the SECURE Act.”

Any successor beneficiary to someone who was already subject to the 10-year rule, however, doesn’t get a new 10-year period, he said. Instead, the successor must empty the account by the end of the first beneficiary’s 10-year period.

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This story was originally published on Aug. 26, 2020. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.