‍Recent changes to rules governing inherited IRAs significantly impact tax and estate planning for many individuals. Notably, The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law in December 2022, bringing over ninety changes to retirement plans and tax laws.

‍

One major area change introduced by the law relates to inherited IRA distribution rules. We believe it is critical to understand the updated inherited distribution rules and how these impact the way wealth passes from generation to generation.

‍

As a reminder, assets in traditional IRAs cannot grow indefinitely; the IRS requires that money must be withdrawn annually once the IRA owner reaches the required beginning date, or RBD. Before the SECURE Act, the RBD was April 1 of the year following the year the IRA owner turned 70 1/2. The original SECURE Act that went into effect in 2020 changed the RBD for IRA owners to April 1 of the year the IRA owner turns 72, but only for IRA owners born on or after July 1, 1949. With the passage of SECURE 2.0, the RBD and required minimum distributions (RMDs) moved to age 73 for those who reached that age in 2023.

‍

Let us begin with the most straight forward case - what happens if you inherit an IRA from a spouse?

If you have inherited an IRA from your spouse, you are in the most privileged position as it relates to distribution rules. You can add the inherited IRA assets to your own IRA and potentially keep it growing, which may give you more money for retirement. Adding inherited assets to your own IRA will preserve the tax deferred (for traditional IRAs) or the taxfree (for Roth IRAs) growth of the inheritance.

‍

Spouses could also keep the assets in an inherited IRA or take a lump sum distribution; each of these options has different tax consequences. Some spouses might even consider disclaiming the inherited IRA assets. You should consult with your tax advisor before you decide on one option versus the other.

‍

Rules become more complex for non-spousal beneficiaries of IRA.

It is imperative to understand the withdrawal options available to you as a non-spousal beneficiary. Many rules apply to withdrawing funds from an inherited IRA. In addition to understanding the type of beneficiary you are to the original account owner, you also need to be aware of the original owner's age when they passed away; your withdrawal options will differ based on whether they had begun or had yet to begin taking RMDs before their passing.

‍

The SECURE Act eliminated the "stretch IRA" for most non-spousal beneficiaries. With the stretch IRA, you could use your life expectancy to minimize IRA withdrawals from traditional IRAs over time. The SECURE Act introduced a new 10-year rule in place of the “stretch” provision. This 10-year rule continues under SECURE 2.0.

‍

For deaths which occurred in 2020 or later, only certain non-spousal individual beneficiaries (called "eligible designated beneficiaries") do not have to deplete the account within 10 years and may use their life expectancy to calculate the minimum amount that must be withdrawn each year. These eligible beneficiaries are:

‍

Chronically ill or disabled non-spousal beneficiaries.

‍

Non-spousal beneficiaries not more than 10 years younger than the account owner who died.

‍

A minor child of the account owner but only until that child reaches age 21. Once the beneficiary reaches 21, they have 10 years to deplete the account.

‍

All other non-spousal beneficiaries must use the new 10-year rule to deplete the account and take annual distributions if the account owner died after age 73 and was taking RMDs. Final IRS regulations, which became effective on September 17, 2024, provided clarity on this issue and become effective in 2025.

‍

Please note that Roth IRAs are subject to the 10-year distribution rule, however there are no annual mandated distributions.

‍

You should carefully consider your choices when you inherit an IRA. Contact your Ingalls & Snyder advisor and your accountant to analyze all your options and discuss available strategies to limit any negative tax consequences.

‍

_{The material is not to be reproduced or distributed to others without Ingalls & Snyder, LLC’s (“Ingalls” or the “Firm”) express written consent. This material is being provided for informational purposes and any opinions expressed in this material are only opinions at the time of writing. Nothing provided by Ingalls should be considered tax or legal advice, and clients should seek advice from their tax and legal professionals. Bridgehampton is a team at Ingalls & Snyder, LLC, an investment advisor registered with the Securities & Exchange Commission and a FINRA member broker dealer. More information including the firm’s Form ADV Brochure and Form CRS can be found at https://www.ingalls.net/importantinformation.}

‍