New IRS Guidance on Inherited IRAs

The Internal Revenue Service (IRS) recently issued new guidance regarding inherited individual retirement accounts (IRAs). This year, individuals who inherited an IRA after 2019 will be allowed to skip the required minimum distribution. However, it is important to note that most beneficiaries are still required to empty the account within a 10-year period.

Confusion surrounding inherited IRAs arose after the implementation of the Secure Act in 2019, which eliminated the "stretch IRA" option for non-spouse beneficiaries. Previously, beneficiaries were able to stretch their required minimum distributions over their own lifetimes, allowing for potential tax-free or tax-deferred growth over several decades.

Under the new rules, non-spouse beneficiaries must now fully withdraw their inherited IRA by the end of the 10th year following the original owner's death. Initially, experts interpreted this to mean that all funds could be withdrawn in the tenth year if desired.

However, in early 2022, the IRS proposed stricter regulations for individuals who inherited an IRA from someone who had already begun taking required minimum distributions (RMDs). In such cases, recipients would be required to continue taking annual distributions. This meant that if RMDs had already started, they could not be turned off after the original owner's death, and beneficiaries would have to withdraw funds and pay income tax on them every year. This came as a surprise to many.

In response to the confusion and the late proposal, the IRS has waived the annual requirement for now. This means that beneficiaries who inherited an IRA from someone who had already begun RMDs are not currently obligated to continue taking annual distributions.

To summarize, the latest guidance from the IRS provides some relief and flexibility for individuals inheriting IRAs. However, it is crucial for beneficiaries to stay informed about any updates or changes in the rules and regulations.

Inheriting an IRA: What You Need to Know

Grandfathered into Old Rules

If you inherited an IRA before 2020, you are in luck. The new rules introduced recently don't apply to you. You are grandfathered into the old stretch IRA rules that were in effect before the law's passage. This means that if you have a required minimum distribution (RMD) scheduled for this year, you still need to take it.

Spousal Inheritance

For spouses who inherit an IRA, things are different. None of the changes mentioned apply to them. Spouses enjoy greater flexibility when it comes to inheriting IRAs. They have the option to roll over their spouse's IRA into their own retirement account, or they can keep it as an inherited account. Either way, they have the ability to stretch distributions based on their own life expectancy, rather than the limited 10 years.

Special Cases

Apart from spouses, there are a few other beneficiaries who are exempt from the new rules. These include beneficiaries who are no more than 10 years younger than the original IRA owner, those who are chronically ill or disabled, and minor children (not grandchildren) of the original owner.

Inheriting an IRA After 2019 with RMDs

If you inherited an IRA after 2019 from someone who had already begun taking RMDs, you do not have to take an RMD this year. However, be on the lookout for final regulations regarding this matter. The account will still need to be drained within 10 years, which means larger distributions will need to be made within a shorter timeframe.

Inheriting an IRA Without RMDs

If you inherited an IRA from someone who hadn't begun taking RMDs, the relief granted on Friday does not apply to you. This is because you were not subject to the tougher RMD rules in the first place. However, you are still required to empty your inherited IRA by the end of the 10th year following the original owner's death.