The SECURE Act and SECURE Act 2.0 have reshaped the financial landscape for retirees and taxpayers. Many individuals continue to grapple with comprehending the latest regulatory shifts as it relates to Inheriting IRAs. The IRS hopes to clarify these questions with their latest release.
Inheriting an IRA Pre-SECURE Act (Deaths prior to January 1, 2020)
Prior to the SECURE Act, there was very little confusion regarding inheriting an IRA. Similar to taking RMDs when alive, once a tax-deferred IRA was inherited, the non-spouse beneficiary could “stretch” distributions over their own life expectancy, allowing for smaller RMDs and potential tax advantages. This option provided beneficiaries with greater flexibility in managing the inherited IRA assets and tax implications.
Inheriting an IRA Post-SECURE Act (Deaths post to January 1, 2020)
Most non-spouse beneficiaries are now mandated to completely distribute their inherited IRA within a 10-year period, commonly referred to as the 10-year rule. This 10-year rule applies regardless of the beneficiary’s age or life expectancy. Exceptions for beneficiaries where “stretch” distributions are still applicable include surviving spouses, minor children of the account owner (until they reach the age of majority), disabled individuals, and individuals not more than 10 years younger than the deceased account owner. Failure to comply with the new regulations may result in an excise tax of 25% of the balance that should have been withdrawn, or 10% if corrected within two years, starting January 1st, 2025.
Strategic Planning: Case Study
Jane (age 85) and John (age 90) are married with one child, Jeffrey (age 55). John passed away years ago (pre-2020) and his Traditional IRA was rolled into Jane’s IRA. Since Jane and John are married, Jane could continue to take “stretch” distributions from John’s IRA. Jane passed away January 1, 2024, leaving Jeffrey her IRA with a balance of $1,000,000. Prior to the SECURE Act, Jeffrey could have taken annual “stretch” distributions over the course of his lifetime (~$34,000/year). Under the new SECURE Act legislation, he’ll keep receiving “stretch” RMD payments for the first nine years. However, by the end of the tenth year, he’ll need to take a lump sum distribution to close out the account. These distributions will be subject to taxation at Jeffrey’s income tax rate, resulting in a substantial tax liability a decade later.
In Conclusion:
Beginning January 1st, 2025, the IRS will start enforcing penalties for annual RMD installments for inherited Traditional or Rollover IRAs associated with non-spouse individuals. It is important to note that this does not impact inherited Roth IRA accounts. This delay allows you the opportunity to strategize and navigate the intricacies of these new changes and their downstream impact for future heirs. We encourage all clients who may have recently Inherited IRAs accounts, will be receiving IRAs as a beneficiary or bequeathing IRAs to discuss these latest updates with your advisor to see how it may impact your situation.
Important Disclosures:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Grimes & Company, Inc. [“Grimes”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Grimes. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Grimes is engaged, or continues to be engaged, to provide investment advisory services. Grimes is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Grimes’ current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at https://www.grimesco.com/form-crs-adv/. Please Note: Grimes does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Grimes’ web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Grimes client, please contact Grimes, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
