IRA rules have changed; heirs need to pay attention

If you’re fortunate enough to own or inherit an IRA, there are some new rules you’ll want to know about.

They are part of the SECURE Act — short for the Setting Every Community Up for Retirement Enhancement Act — that Congress passed last year. The law made dozens of changes in rules for retirement plans, including tweaks aimed at helping people save more of a nest egg.

The law, for instance, did away with the deadline for contributing to an individual retirement account. Previously, savers had to stop stashing money away when they turned 70½ — and they had to start taking money out each year.

But now you can save in an IRA past the old cutoff, as long as you’re working. And you don’t have to start taking money out until you turn 72.

Other parts of the law, however, put restrictions on inherited IRAS, and if you have one or are thinking of bequeathing one, it’s worth paying attention. The old rules were comparatively simple: Before

this year, those lucky enough to inherit an individual retirement account had to take some money out of it each year. However, they could “stretch” out the withdrawals over their lifetimes — years or even decades. “You could take little crumbs out, and let it grow tax-deferred over decades,” said Ed Slott, a certified public accountant and IRA expert in Rockville Centre, N.Y. Required annual withdrawals were based on life expectancy, so the technique was especially helpful for young children or grandchildren, whose mandatory withdrawals would be quite small. Now, heirs have just 10 years to drain an account:

Under the new rules, many people who inherit an IRA must empty it, and pay any required taxes, within 10 years.

Someone who inherits an IRA from a parent at age 55, for example, might be at her peak earning period and would prefer to delay adding to her income to avoid higher taxes. Now, though, she must drain the funds within a decade, said David Flores Wilson, a certified financial planner in New York City.

The new rules apply to accounts inherited after Dec. 31, 2019. Heirs of IRA owners who died in 2019 and earlier can still use the stretch approach. But there are exceptions: A spouse may still inherit an IRA and continue to stretch withdrawals over time, and so can the account owner’s children — at least, until they turn 18 or 21 (the 10-year clock starts then), depending on the state.

People with disabilities and those with chronic illnesses who inherit an IRA are also exempt from the 10year withdrawal deadline. And a beneficiary who is less than 10 years younger than the account’s owner — say, a brother or sister — can also continue to “stretch” the IRA.

The new rules apply to traditional IRAS and Roth IRAS as well as 401(k) workplace retirement accounts.

The rules don’t take effect until 2022, though, for 403(b) and 457(b) plans, available to government and nonprofit workers, as well as for the federal Thrift Savings Plan, the retirement program for federal employees.

On the plus side, the new rules for inherited IRAS did away with one onerous feature: required minimum withdrawals. Instead of being obligated to withdraw some money each year, those who inherit an account can take withdrawals periodically or wait until the end of the 10-year period to drain the balance, if that works best for them, Slott said.