What happens to this inherited IRA for a new beneficiary?

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Q. I know there were changes to inherited retirement account distributions under the SECURE Act. Does it cover TIAA retirement-like accounts? And for a successor beneficiary in 2020 who inherits an IRA that was already giving distributions under the old rules, is this also subject to the new 10-year rule? Could they avoid it by moving the account?
— Trying to get it

A. Changes to retirement accounts under the SECURE Act, which became law on Dec. 20, 2019, affect all U.S. taxpayers

The SECURE Act applies to both IRA accounts and defined contribution retirement plan accounts, such as 401(k) and 403(b) plans, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

Let’s first review the new 10-year rule that was enacted by the SECURE Act as it applies to the original beneficiaries.

“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.

The new rules don’t require annual distributions, or any distributions at all, within the 10-year period, he said.

“In other words, there are no Required Minimum Distributions (RMDs) for those subject to the 10-year rule,” he said. “Instead, a non-spouse beneficiary can choose to wait the full 10 years before emptying the account, or can take distributions of any amount at any time along the way.”

A spouse beneficiary, on the other hand, 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 rolling over the inherited IRA into their own IRA instead, he said.

In addition to spouses, exceptions to the 10-year rule apply for minor children until they reach the age of majority, for disabled or chronically ill people, and for beneficiaries who are 10 or fewer years younger than the account owner, he said.

Now to your specific question.

Anyone who inherits a retirement account as a beneficiary can, in turn, name their own beneficiary. That second beneficiary, who would inherit any funds remaining in the account upon the death of the original beneficiary, is called a successor beneficiary.

The rules are different for successor beneficiaries.

“All successor beneficiaries to someone who dies in 2020 or later years, whether spouses or non-spouses, are subject to the 10-year rule,” McGovern said. “The rule applies regardless of whether the account is transferred to a new custodian.”

Moreover, if the first beneficiary was already subject to the 10-year rule, the successor beneficiary doesn’t get a new 10-year period. Instead, the clock continues to run, and the successor must empty the account by the end of the first beneficiary’s original 10-year period, he said.

“Note also that an inherited IRA may not be combined with another IRA owned by the beneficiary,” McGovern said. “He or she can, however, combine two inherited IRAs, but only if they were inherited from the same person. If they were inherited from two different people, the IRAs can’t be combined.”

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This story was originally published Oct. 9, 2020.

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