Are You a Non-Spouse Beneficiary of an Inherited IRA? The IRS Has New Rules for You

Are You a Non-Spouse Beneficiary of an Inherited IRA? The IRS Has New Rules for You

June 27, 2022
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If you are a non-spouse beneficiary of an IRA, proposed IRS rules regarding distributions may impact your situation. In February 2022, the IRS and Treasury Department reinstated SECURE Act RMD requirements for IRAs inherited in 2020 or later. The new rules apply to non-spouse beneficiaries and distributions, and override earlier releases published in May 2021. Here are the essential distribution requirements non-spouse beneficiaries need to know to ensure compliance and avoid IRS penalties:

Traditional IRA Required Minimum Distributions (RMDs) accelerate- If you inherited a Traditional IRA from someone who had already started taking Required Minimum Distributions (RMDs) before January 1, 2020, you can't wait until year ten to begin taking the distribution. Instead, you now have to take annual distributions in years 1-9, taking the entire balance by year ten. Other notable requirements include:

  • RMDs for non-spouse beneficiaries start one year after the account owner's death.
  • Non-spouse beneficiaries must take a 2021 distribution if the rule applies, if they have not done so already.
  • Non-spouse beneficiaries of an inherited IRA where the owner has not started RMDs must take annual distributions in years 1-9, with the entire balance taken by year ten.

Inherited Roth IRAs have new rules, too- While Roth IRAs offer tax-free distributions on contributions and earnings, they also have the same distribution requirements retroactive to January 1, 2020:

  • Distributions must start one year after the Roth IRA owner's death
  • Annual distributions are required in years 1-9
  • Beneficiaries must take the entire Roth IRA balance by year ten.

Exceptions to the 10-year distribution rule-

  • A surviving spouse
  • A disabled or chronically ill person
  • A child who hasn't reached the age of majority
  • A person not more than ten years younger than the IRA or pre-tax retirement savings account owner

Required distribution penalties still apply- Non-spouse beneficiaries that fail to take a required distribution in years 1-9 or the entire balance by year ten face a 50% penalty on the distribution amount that should have been taken each year.

Stretch IRAs are over- In February 2022, and as part of the SECURE Act's revision on distributions, Congress eliminated the stretch for inherited IRAs starting in 2020.

Do you have questions about inherited IRAs?

Due to the complexity of the SECURE Act's distribution requirements on inherited IRAs, please reach out to us for guidance on how the IRS rules may impact your situation.

 

 

Sources:

https://www.forbes.com/sites/ashleaebeling/2022/03/04/irs-nixes-10-year-stretch-for-most-inherited-iras/?sh=7312f3626ac3

https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp

 

 

Important Disclosures

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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