Navigating legislative changes like the SECURE Act and SECURE Act 2.0 can be bewildering, especially with their impact on inherited IRA Required Minimum Distributions (RMDs). But fear not! This article provides clarity with dos and don’ts, along with definitions, to simplify the process of managing an inherited IRA.
Key Considerations for Inherited IRA Beneficiaries
Do’s:
- Determine the type of beneficiary you are – different beneficiaries have different rules on drawing down the IRA.
- Withdraw funds within the required timeframe under the new laws.
- Maintain at least the same withdrawal rate as the original owner if they had reached the Required Beginning Date (RBD) before their passing.
- Avoid the 25% under-withdrawal penalty by following the correct withdrawal schedule.
- If you have reached your own RBD, consider using inherited IRA RMDs for qualified charitable distributions.
- Understand that a “death distribution” exempts you from the 10% early withdrawal penalty but remains subject to ordinary income tax.
Don’ts:
- Ignore the account and fail to withdraw funds.
- Overlook tax reporting requirements—each withdrawal generates a 1099-R.
- Assume only traditional IRAs are affected—these rules apply to Roth, SEP, and other IRAs.
- Neglect to consult your tax advisor for the most tax-efficient withdrawal strategy.
- Miss the opportunity to reinvest distributed IRA assets—speak with your financial advisor for reinvestment options.
Understanding Your Beneficiary Type
Inheriting an IRA comes with responsibilities, and understanding the rules can help you avoid costly mistakes. Whether you’re required to withdraw funds over a set period or have the flexibility to stretch distributions, the key is knowing where you stand. Failing to follow the guidelines can result in unnecessary penalties, but with careful planning, you can make the most of your inheritance while staying compliant with tax laws.
Types of Beneficiaries+ –
- Eligible Designated Beneficiaries (EDBs) – are spouses*, a minor child of original owner, someone who is disabled**, someone who is chronically ill** or someone who is less than 10 years younger than the original IRA owner.
- Non-Person – an entity (i.e. Charity, or Estate)
- Non-Eligible Designated Beneficiary (Non EDBs) – everyone else
Now that we understand the classifications of IRA beneficiaries, let’s look at the rules on how they must distribute the funds. By adhering to these guidelines, beneficiaries can navigate the complexities effectively.
Withdrawal Requirements by Beneficiary Type
*Spouse beneficiaries – spouses are the only beneficiaries who can choose if they want to keep the inherited IRA as an inherited IRA or combine it with their own IRA. There are reasons for both options, but this decision must be made no later than the year after the IRA owner’s death. This decision cannot longer be reversed.
**Disabled and chronically ill beneficiaries must provide qualifying documentation to Custodian no later than 10/31 of the year following the IRA owner’s death.
***RBD – Required Beginning Date. This pertains to the age of the original account owner and if they had already began taking annual Required Minimum Distributions (RMDs) prior to their death. In 2024, that is April 1st of the year after turning 73.
+Trust Beneficiaries are not mentioned in this article, as depending the type of trust and how it was established will determine if that trust is an EDB, Non EDB or Non-Person beneficiary.
By adhering to these guidelines, beneficiaries can navigate the complexities effectively. Remember to determine your beneficiary type, adhere to withdrawal schedules, report withdrawals accurately, and seek professional advice for tax-efficient strategies and reinvestment options. Whether you’re an Eligible Designated Beneficiary (EDB), a Non-Eligible Designated Beneficiary (Non-EDB), or a non-person entity, staying informed and proactive is key to managing inherited IRAs with confidence and compliance.
For more insights on wealth management and financial planning, check out our resource library or connect with one of our advisors at BentOak Capital.
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