How SECURE impacts inherited IRA beneficiaries

Americans held $33 trillion in individual retirement accounts in 2022, and many of those IRA holders have yet to withdraw their funds and pay taxes on them.

With the total debt of the U.S. federal government standing at $35.46 trillion in 2024, Washington is interested in having fewer IRA beneficiaries stretch their inherited assets.

In July, the IRS issued final regulations on the SECURE Act, which included updating the rules on taking required minimum distributions from IRAs and eliminating the stretch provision for many IRA beneficiaries.

Ann Hagerty, advanced sales counsel with Securian Financial, gave a rundown on the new regulations during a recent webinar by the National Association for Fixed Annuities.

Rules depend on owner's RBD

Many of the rules surrounding inherited IRAs depend on whether the original owner died before or after their required begin date, she said. Hagerty went on to explain the types of IRA beneficiaries effected by the SECURE Act’s changes to IRA stretch rules.

Two types of IRA beneficiaries are impacted by changes to the stretch rules, she said. They are non-designated beneficiaries and non-eligible designated beneficiaries. Eligible designated beneficiaries are still able to stretch an IRA.

Non-designated beneficiaries

Non-designated beneficiaries are entities and not people. They include the deceased IRA owner’s estate, a charity or a nonqualifying trust. Hagerty explained the post-death payout rules for these beneficiaries.

• If the IRA owner or plan participant dies before the owner’s required beginning date, the account must be withdrawn under SECURE’s five-year rule.
• If the owner dies on or after the RBD, required minimum distributions must be taken over the deceased owner’s remaining single life expectancy. This is often known as the “ghost rule,” Hagerty said.

Non-eligible designated beneficiaries

These beneficiaries are any nonspouse beneficiaries who don’t qualify for the IRA stretch under the current rules. “SECURE brought the hammer down on these folks because they can no longer stretch the IRA they inherit,” Hagerty said.

Non-eligible designated beneficiaries include grandchildren, older children and qualifying trusts. Under the new rules for these beneficiaries, the beneficiaries must withdraw funds from the IRA over a 10-year period defined as ending on Dec. 31 of the 10^th year following the original IRA owner’s death.

• If the original owner died before their RBD, beneficiaries are not required to take RMDs but all distributions must be completed before the end of the 10-year period.
• If the original owner died after their RBD, the beneficiary must take RMDs based on their own life expectancy in years 1 through 9 and take the final distribution before the end of the 10-year period.

Eligible designated beneficiaries

These are what Hagerty described as “the VIPs of beneficiaries,” and are able to stretch an inherited IRA under SECURE rules. Eligible designated beneficiaries include surviving spouses, minor children, disabled individuals, chronically ill individuals and individuals not more than 10 years younger than the IRA owner.

A surviving spouse has the most options when inheriting an IRA, Hagerty said. One option is taking a spousal rollover, which includes transferring the assets into a new IRA or the surviving spouse’s existing IRA. The IRA assets can continue to grow tax-deferred and the IRA will be subject to normal IRA distribution rules if the surviving spouse is under age 59½. A spousal rollover is not a good option for a surviving spouse under 59½ because they will be subject to a 10% penalty if they withdraw funds from the IRA before reaching age 59½. But a spousal rollover can be done anytime after the surviving spouse reaches age 59½ and that IRA will be treated as the spouse’s own.

If the spouse keeps the IRA as an inherited IRA, no 10% early distribution penalty applies, so this is a good option for a younger spouse who needs distributions, Hagerty said. Mandatory RMDs are taken over the spousal beneficiary’s single life expectancy unless they are more than 10 years younger than the original owner, in which case they would use the joint and last survivor table.

SECURE’s final regulations define a minor child as an eligible designated beneficiary until their 21^st birthday. The minor child must be the child of the original IRA owner, Hagerty said. After the child no longer qualifies as a minor, they must take RMDs based on their life expectancy during the 10-year period regardless of when the original IRA owner died. If multiple minor children of the IRA owner are beneficiaries, a full distribution under the 10-year rule occurs when the youngest child reaches age 21.

Eligible beneficiaries who are disabled or chronically ill must have had their disability or illness at the time of the IRA owner’s death in order to take advantage of IRA stretch eligibility.

“The SECURE Act is really a down payment for the deficit because we have these unpaid taxes on IRAs,” Hagerty said. “We are shifting when people are taking money out of IRAs. Washington is looking at this from the perspective of ‘we’re trying to get this IRA money out faster in larger portions at a higher tax rate.’”

© Entire contents copyright 2024 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.