Is the IRA Inheritor an eligible designated beneficiary?
The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the RMD requirements for inherited IRAs. A key question is whether or not the inheritor of the IRA is an eligible designated beneficiary. An eligible designated beneficiary receives preferential treatment and has more options for delaying distributions from the IRA. Five types of individuals qualify for this treatment:
- The surviving spouse of the original (deceased) IRA owner
- A minor child of the original IRA owner
- A beneficiary who is disabled
- A beneficiary who is chronically ill
- A beneficiary who is less than 10 years younger than the original IRA owner
The owner of an inherited IRA who qualifies under one of these five categories can take RMDs from the inherited IRA based on their own life expectancy or the life expectancy of the deceased original owner, depending on which of the five categories applies. If a beneficiary’s status under one of these categories changes, however, their RMD timing may also change.
All other IRA inheritors:
What if the beneficiary does not fall into one of those five categories? The SECURE Act requires that the entire balance of the IRA be distributed by Dec. 31 of the 10th year following the original owner’s date of death. This is a substantial departure from what the law required before the SECURE Act, when most beneficiaries could take advantage of life expectancy provisions to stretch inherited IRA distributions.
What if there is no designated beneficiary?
Sometimes when an IRA owner dies, the owner’s estate is named as the beneficiary or the estate becomes the beneficiary by default. The RMD in that situation depends on whether the deceased owner had started taking his or her RMDs before death. If the owner died after taking RMDs, distributions can continue over the life expectancy of the deceased owner. If the owner died before taking RMDs, the severe five-year rule applies, and the entire balance of the IRA must be distributed by Dec. 31 of the fifth year following the year of death.
Related, read my colleague’s post about the importance of naming IRA beneficiaries.
This discussion only provides a general overview of the taxation of inherited IRA assets. There are many variations on these rules and some options that can affect the most beneficial treatment of an inherited IRA. The spouse of a deceased IRA owner may need to choose between several alternatives to achieve the most appropriate result. If there are multiple beneficiaries of the IRA or a trust beneficiary, or if the IRA has changed ownership before because of a prior death, the results can be quite different. Some IRA documents or trustees may employ varying RMD policies. Your Parsec advisor and tax professional can help you navigate the details of your situation.