Inheriting an individual retirement account (IRA) can be a great benefit for heirs, but it also comes with its own set of challenges. Experts warn that navigating the rules and regulations surrounding inherited IRAs can be quite complex, especially with recent changes brought about by the Secure Act of 2019.
One major change introduced by the Secure Act is the reduction in the time allotted for heirs to deplete inherited accounts through required minimum distributions. Previously, heirs were able to “stretch” withdrawals over their lifetime, but now certain heirs have a 10-year window to withdraw the full amount from the inherited account.
According to IRA expert Ed Slott, the new rules regarding inherited IRAs can be difficult to understand and follow. He describes the process as a “quagmire of rules” that makes it challenging for heirs to access their inheritance in a timely manner.
Certified financial planner Ashton Lawrence highlights the complexity of inherited accounts, noting that beneficiaries are generally required to take a distribution by December 31 of the year of the original owner’s death. The rules surrounding inherited accounts depend on various factors, such as when the original owner died, whether they had started required minimum distributions, and the type of beneficiary.
For heirs who received the IRA before 2020, they may still be able to use the “stretch” rules to take lifetime withdrawals. However, for non-eligible designated beneficiaries who inherited the account on or after January 1, 2020, they must adhere to the 10-year withdrawal rule, meaning everything must be withdrawn within 10 years of the original owner’s death.
It’s important for heirs to be aware of the penalties associated with missed required minimum distributions. While the IRS typically imposes a penalty for missing RMDs or not withdrawing enough, they have waived the penalty for some inherited IRAs in 2022 and 2023. Despite the waiver, experts advise heirs to consider taking RMDs to avoid a larger distribution in the future.
In conclusion, inheriting an IRA comes with its own set of rules and regulations that heirs need to navigate carefully. Seeking advice from financial experts and staying informed about the latest changes in legislation can help heirs manage their inherited accounts effectively and avoid potential penalties.
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