Some basics if you inherited an IRA in 2021
If you inherited an IRA this year, you are no doubt becoming familiar with the SECURE (Setting Every Community Up for Retirement Enhancement) Act. How do I know? Readers are asking questions.
Let’s go through some basics.
The SECURE Act applies to IRA owner deaths occurring after 2019. If you inherited an IRA from before 2020, the SECURE Act does not apply.
The SECURE Act created the concept of eligible designated beneficiary (EDB) and noneligible designated beneficiary (NEDB). Different rules apply to EDBs and NEDBs when it comes to mandated withdrawals (required minimum distributions, or RMDs) from inherited IRAs. Yes, if you inherit an IRA, no matter your age, you must withdraw your RMDs.
As before the SECURE Act, the ultimate goal of RMD rules is to have you withdraw funds from the IRA over time. NEDBs are limited to 10 years from the year of the owner’s death. RMDs for EBDs can be stretched over their lifetimes.
Before going any further, I advise anyone who inherited an IRA this year to get tax advice promptly. (Some beneficiaries need to act before year-end. If you didn’t see my recent column “Does Your Inherited IRA Have a Deadline For 2021?” let me know and I’ll send you a copy.)
Most situations are likely to be NEDBs, since EDBs are limited.
An EDB, according to the IRS (tinyurl.com/4spbyxnz ), “includes a surviving spouse, a disabled individual, a chronically ill individual, a minor child or an individual who is not more than 10 years younger than the account owner.”
If you inherited the IRA from your mother or father, and you are not “a disabled individual, a chronically ill individual [or] a minor child,” you are an NEDB.
As the IRS says in Publication 590-B (tinyurl.com/2xc7cmut): “The 10-year rule applies if ... the beneficiary is a designated beneficiary who is not an eligible designated beneficiary, regardless of whether the owner died before reaching his or her required beginning date.” (”Required beginning date,” or RBD, is the date an IRA owner must start taking RMDs.)
The reference to RBD has to do with a pre-SECURE Act rule that looks at the age of the traditional tax-deferred IRA owner at death. If you inherited a traditional IRA from someone who was 40 years old at death, he or she was not subject to RMDs during his or her lifetime. In contrast, if you inherited a traditional IRA from someone age 80, for example, he or she was required to take RMDs. (I’m stressing “traditional” to contrast Roth IRAs, as owners do not have RMDs during their lifetimes.)
What are the details of the 10-year rule? Again, I refer to IRS Publication 590-B:
“The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death.”
You may feel that this subject is far too complicated to learn about (and I agree). Here’s the problem with that point of view: If you don’t follow the RMD rules properly, there are hefty IRS penalties to pay (again, see tinyurl.com/4spbyxnz).
I recommend that anyone who inherits an IRA talk to his or her tax adviser. The rules are complex (some would say unnecessarily so). And, the outcome will depend upon your particular circumstances.
Also note that the 2020 Publication 590-B has been revised by the IRS for some changes, such as a clarification earlier this year of the 10-year rule (see tinyurl.com/484r56n3). In addition, be sure to follow recent developments at tinyurl.com/bvb5dxu8.
We’ll talk more about inherited IRAs in future columns. If you have questions, send them to me.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2020 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.