Inherited IRAs and the SECURE Act

The SECURE Act of 2019 caused a flurry of changes to the world of retirement plans and income tax planning.  Some of these changes were viewed as beneficial to the taxpayer, such as extending the age for mandatory minimum distributions from retirement accounts from age 70 ½ to 72 years old.  Other aspects of the SECURE Act presented new challenges and room for misinterpretation which appears to be the case for inherited IRAs.

Under the old tax rules (in effect through December 31, 2019), someone who inherited an IRA would be required to take distributions upon receipt of the plan.  In most cases, the required minimum distributions would be based on the recipient’s remaining life expectancy (using an IRS published tables).  This allowed for the IRA to continue for the life of the recipient and ideally create some growth in value to supplement the recipient’s income.

The SECURE Act changed these rules for most taxpayers and instead it imposed a deadline for inherited IRA recipients to completely distribute assets of the retirement account to the beneficiary.  Depending on the recipient and certain fiduciary terms, the new rules required full distribution of retirement plan assets by either 5 years or 10 years from the receipt of the IRA.  When this rule was introduced, many professionals and taxpayers understood this to mean that they could avoid required minimum distribution rules until the final year when complete liquidation is required.  According to recently proposed regulations, the IRS is attempting to clarify that during the 5- or 10-year holding period, the owner of an inherited IRA is still required to take annual distributions up until the final liquidation of the account.  This would mean that the recipient will need to take annual distributions, thereby limiting their ability to leave funds in the inherited IRA to grow during their ownership period.

This is a major consideration for anyone that inherited an IRA after December 31, 2019. We will keep you posted as things continue to develop in Congress.