Inherited IRAs After the SECURE Act

There are now two sets of rules regarding how distributions to designated beneficiaries must be taken for inherited IRAs and other retirement plans, when the account owner has died in 2020 or later. For deaths in 2019 or before, the old “stretch IRA” rules continue to apply.

This bifurcation of rules for inherited IRAs came about with the passage of the SECURE Act in late 2019. There is a set group of Eligible Designated Beneficiaries now, and then all other designated beneficiaries. Each type is treated differently for inherited IRAs.

Eligible Designated Beneficiaries

There are five types of individuals who make up the group of eligible designated beneficiaries. The five are:

• Spouse beneficiaries
• Minor child (of the original owner) beneficiaries
• Disabled beneficiaries
• Chronically Ill beneficiary
• Beneficiary who is not more than 10 years younger than the original owner

Each of these beneficiary classes has the option of using the old-style of required distribution of inherited IRAs, utilizing the individual beneficiary’s own lifetime as the period over which to distribute the account.

This means that you’ll go to Table I (or Table III if it’s advantageous to do so), and locate your age for the first year of distributions (the year after the year of the original own-er’s death). The factor you find in the applicable table indicates the divisor (number of years) for your distribution. Take the previous year end’s final balance in the account, and divide by your factor.

For example, let’s say you’re a disabled beneficiary of an IRA that was owned by your brother, and he passed away the prior year (for the purpose of this illustration, the year of his death was 2020 or later). You are 40 years old, and the prior year end balance in the account was $150,000. Your Table I factor (see Appendix A) is 43.6. Divide $150,000 by 43.6 and your result is $3,440.37. You must take a distribution of at least $3,440.37 by the end of the year to meet your RMD requirement.

The following year, you will take the year end balance again, but now you subtract 1 from your prior year’s factor, so you have 42.6 as your new factor. The balance of the account at year end was $154,000. Dividing by 42.6 gives us $3,615.02. For each subsequent year, subtract 1 from the prior year’s factor and repeat the process.

All Other Designated Beneficiaries

When you inherit an IRA from someone other than your spouse (and you’re not otherwise an eligible designated beneficiary as described above) , you are eligible to take advantage of certain protections or deferrals of tax inherent in the IRA, but you are restricted in your actions with the account.

Restrictions

Specifically, as a non-spouse beneficiary you are not allowed to treat the IRA as your own – in other words, the account can only be re-titled as an inherited IRA, and you cannot make contributions to this account. You can move the account to another custodian (via trustee-to-trustee transfer only) or leave it at the same custodian and change the title to read as “John Doe IRA (Deceased January 21, 2020) FBO Janie Brown” or something very similar.

In addition to the restriction on titling, the beneficiaries of inherited IRAs must take complete distribution of the IRA proceeds within 10 years, beginning with the year following the year of the death of the original owner.

The Designated Beneficiary

The designated beneficiary is generally determined on September 30 of the year following the year of the death of the plan owner. In order to be named the designated beneficiary, an individual must be named on the plan documents as of the date of death (no changes can be made after death). If any person who is named the beneficiary in the plan documents is no longer a beneficiary as of September 30 of the year following the year of death, such person will not be considered as a possible designated beneficiary. This could come about if one of the original beneficiaries chose to disclaim entitlement to the account.

If an individual who is the primary beneficiary as of the owner’s date of death dies prior to September 30 of the year following the year of death, this individual is still considered to be the primary beneficiary, rather than any contingent beneficiaries. The deceased beneficiary’s estate (or per stirpes designation) would receive the account.

If the account is split (as described in Splitting Inherited IRAs), each beneficiary of the inherited account(s) will be considered the designated beneficiary of that split account. This applies if the account has been split before December 31 of the year following the year of death of the original owner.

Distribution Rules

The following distribution rules apply for inherited IRAs:

• you’re allowed to spread the distribution out in monthly, quarterly, annually, or any schedule of payments as long as the account is fully distributed by the end of the tenth year following the year of the death of the original owner;
• if you are the beneficiary of more than one IRA, you must determine distribution timeline for each inherited IRA individually;
• there is no annual RMD for inherited IRAs (unless inherited by an eligible designated beneficiary), only the 10-year complete distribution rule.