How SECURE changed the rules for inherited IRAs

The SECURE Act changed the rules for many individuals who inherited individual retirement accounts. However, even though SECURE took effect five years ago, advisors continue to receive questions from clients about IRS regulations that complicate the rules for certain classes of IRA beneficiaries.

Jay Kautt, vice president of advanced market sales with Athene USA, discussed IRA beneficiary rules after SECURE during a recent webinar for the National Association for Fixed Annuities.

SECURE limited the ability of some inherited IRA beneficiaries to stretch their distributions from the IRA. Non-eligible designated beneficiaries and non-designated beneficiaries are restricted in their ability to stretch distributions beyond 10 years. Eligible designated beneficiaries, such as spouses, are still able to do the inherited stretch.

Kautt broke down who is eligible to stretch and who is restricted, and what advisors must know to keep IRA beneficiaries from running afoul of IRS regulations.

Five classes of beneficiaries who are eligible to stretch are spouses, individuals who are disabled at the time of the IRA holder’s death, individuals who are chronically ill at the time of the IRA holder’s death, a beneficiary who is not more than 10 years younger than the IRA holder, and minor children of the IRA holder.

Kautt described a few twists in the rules pertaining to these eligible designated beneficiaries.

A minor child can take required minimum distributions on the inherited IRA based on their life expectancy until they turn 21. After that, the 10-year rule kicks in and the entire IRA account must be emptied by the year in which they turn 31.

As for the eligibility of beneficiaries who are not more than 10 years younger than the IRA holder, beneficiaries who are older than the IRA holder are also eligible to stretch the IRA. This rule often applies when an IRA holder’s siblings inherit the account, Kautt said.

A spouse who inherits an IRA has several options available, Kautt said.

“A spouse has the unique ability to take an inherited IRA and treat it as their own; it’s as if the deceased IRA holder never existed,” he said.

The spousal beneficiary isn’t required to take RMDs from that IRA until they reach the applicable age for taking them. However, if the beneficiary is younger than age 59 ½, they are subject to a 10% penalty if they take money out of the IRA.

Looking at a hypothetical example of a 50-year-old woman who inherits her husband’s IRA, Kautt provided several options for her.

She can leave the IRA in inherited status, have access to the funds free of penalty and not have to take an RMD until the original owner would have reached his applicable age. The IRS placed no time limit on her ability to move that IRA from inherited status to her own account.

She can leave the IRA in inherited status until she turns 59 ½ and then retitle it to her own account. Kautt said there are several advantages of doing this. Now she knows exactly when RMDs start – when she turns 75. The beneficiaries of this IRA now will be primary beneficiaries and not successor beneficiaries of an inherited IRA. In addition, she is free to convert the account to a Roth IRA after she retitles it as her own. An inherited IRA cannot be converted to a Roth IRA.

Non-eligible designated beneficiaries

Anyone who is not an eligible designated beneficiary is subject to the 10-year rule, Kautt said.

The IRS changed the rules requiring certain beneficiaries to be subject to annual RMDs in years 1-9 and the 10-year rule. The final regulation issued in 2024, bifurcates the 10-year rule based on the age of the IRA holder at death. The key is the IRA holder’s required beginning date, which is April 1 of the year after the IRA holder reaches the age when their first RMD is due.

If the IRA holder died prior to their required beginning date for taking RMDs, the beneficiaries are subject to the 10-year rule, are not required to take annual RMDs but must liquidate the entire account balance by the end of the 10^th year following the IRA holder’s death. If the IRA holder died on or after the required beginning date, the beneficiaries must take annual RMDs in years one through nine, and the entire account balance must be liquidated by the end of the 10^th year following death.

One distinction pertains to beneficiaries of Roth IRAs, Kautt said. Roth IRAs do not have a required date to begin taking RMDs, therefore, beneficiaries do not have to take RMDs from the account. However, the Roth IRA account must be liquidated by the end of the 10^th year following the original account holder’s death.

Successor beneficiaries of an inherited IRA are no longer able to continue a life expectancy stretch of that IRA; they are limited to 10 years or less. If the original IRA holder died on or after Jan. 1, 2020, the successor beneficiary steps into the shoes of the inherited IRA holder and has only what is left on the original 10-year period before having to liquidate the account. If the successor beneficiary inherited the IRA from an eligible designated beneficiary, they have the full 10 years before having to liquidate the account.

Non-designated beneficiaries

Non-designated beneficiaries are charities, estates and nonqualifying trusts, Kautt said. These beneficiaries do not have a life expectancy; therefore, SECURE didn’t change the rules regarding inherited IRAs.

If the IRA holder died prior to the required beginning date, the non-designated beneficiary must liquidate the account within five years. If the IRA holder died on or after that date, the beneficiary must withdraw funds based on the “ghost” life expectancy of the original account holder.

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