Deciphering the Complicated Rules of Inherited Retirement Accounts: Navigating the SECURE Act, SECURE 2.0, and Final Regulations

The SECURE Act, SECURE 2.0, and final regulations released in July 2024 have created a complex maze of rules surrounding distributions from inherited retirement accounts. Key definitions to understand include eligible designated beneficiaries (EDB) and non-eligible designated beneficiaries (NEDB). The required beginning date (RBD) for taking required minimum distributions (RMDs) has changed with the introduction of age brackets based on the year of birth.

There are four common scenarios for inheriting IRAs, focusing on traditional IRAs as Roth accounts have their own rules. For a spouse inheriting an IRA before the RBD of the original owner, options include an inherited IRA stretch, the inherited IRA 10-year rule, or a spousal transfer. If a spouse inherits an IRA after the RBD, they must take the RMD due for the year of death for the original owner in addition to following similar rules as above.

For an adult child who is a NEDB, money is typically rolled into an inherited IRA with different rules before and after the RBD. A disabled adult child, as an EDB, can stretch distributions over their life expectancy using the IRS single-life tables.

Tax planning is essential in navigating the complexities of these rules and associated tax implications. It is important to project RMDs in planning software to understand tax trends and ensure the software is updated with legislative changes. Inputting correct information, including the original owner’s date of birth and date of death, is crucial to accurate planning.

While the rules surrounding inherited retirement accounts are complex, waivers were in place for distributions from 2020 to 2024. However, the 10-year clock for distributions is still in effect. It is recommended to work with a financial planner who is knowledgeable about these rules and can assist in creating a tax-efficient distribution strategy.

Overall, the combination of the SECURE Act, SECURE 2.0, and final regulations has significantly impacted the rules surrounding inherited retirement accounts, making it crucial for individuals to carefully navigate these complexities to ensure compliance and optimal tax planning strategies.