Inherited IRAs

There have been a number of changes to the required minimum distribution (RMD) rules that apply to traditional IRA and 401(k) accounts. The age at which these distributions must begin for account owners has been pushed out to age 73, new life-expectancy tables have been implemented to acknowledge that retirees are living longer, and non-spouse beneficiaries can no longer stretch withdrawals from retirement accounts over their own life expectancy. Instead, these inherited accounts must be withdrawn within 10 years of the owner’s death. This change, made under the SECURE Act of 2019 was dubbed the death of the “stretch IRA” and was designed to accelerate the receipt of tax revenue from IRAs after they are passed on to children.

The new 10-year rule applied to IRA and 401(k) accounts inherited by non-spouse beneficiaries due to death’s occurring after 2019. Spouses were not impacted since they already have the option to treat inherited accounts as their own and take distributions over their own life expectancy. The original reading of the SECURE Act left many IRA beneficiaries, account custodians and financial planners with the impression that a non-spouse beneficiary could leave an inherited IRA intact until just before the 10th anniversary of the owner’s death, taking no withdrawals until the final year, then pulling out the entire account balance.

Subsequent guidance issued by the IRS has made it clear the IRS interpreted the Act differently. For beneficiaries who inherited accounts after the original owner had reached the age at which their RMDs had begun, withdrawals from the inherited IRA needed to continue annually based on the life expectancy of the beneficiary. This basically allowed for a mini-stretch IRA, but still required the account to be emptied by the 10th anniversary of the owner’s death.