If you’ve recently inherited an IRA (Individual Retirement Account) from someone who passed away after December 31, 2019, you’re likely facing a new set of rules that can feel confusing and overwhelming. The Secure Act, passed in 2019, changed how inherited IRAs work for most people. This practical guide will walk you through everything you need to know about inherited IRAs under the Secure Act, including who qualifies for special rules, what steps you need to take, which documents you’ll need, important deadlines, costs, and common mistakes to avoid. By the end, you’ll know exactly how to handle your inherited IRA and avoid costly penalties.
What You’ll Accomplish with This Guide:
– Understand who is affected by the Secure Act’s new inherited IRA rules
– Learn if you qualify as an “eligible designated beneficiary” with special options
– Follow a clear, step-by-step process for managing your inherited IRA
– Gather the right documents and know where to find official forms
– Stay on top of deadlines, taxes, and penalties
– Avoid common mistakes that can cost you money
– Know your next steps and where to get more help
Who Needs to Follow These Rules? (Eligibility Requirements)
The Secure Act’s new rules apply if:
– The IRA owner died after December 31, 2019
– You are a beneficiary of that IRA (traditional or Roth)
– The IRA is not part of a collectively bargained plan with a delayed start date
Key Terms:
– Designated Beneficiary: Anyone named on the IRA as a beneficiary (not just a spouse or child).
– Eligible Designated Beneficiary (EDB): A special group of beneficiaries who get more flexible options.
You are an Eligible Designated Beneficiary if you are:
– The surviving spouse of the IRA owner
– The minor child of the IRA owner (not a grandchild), until you reach the age of majority (usually 18, but can be up to 26 if you’re still in school)
– A person who is disabled or chronically ill
– A person who is not more than 10 years younger than the IRA owner
If you don’t fit one of these categories, you are a regular “designated beneficiary” and must follow the 10-year rule.
Step-by-Step Process for Managing an Inherited IRA
1. Confirm Your Beneficiary Status
- Check the IRA paperwork to see if you’re named as a beneficiary.
- Determine if you’re an EDB (see above) or a regular designated beneficiary.
- If you’re unsure, ask the IRA custodian (the bank or company holding the IRA) for help.
2. Understand the 10-Year Rule
- Most beneficiaries must withdraw all the money from the inherited IRA by the end of the 10th year after the IRA owner’s death.
- No annual withdrawals are required—you can take out any amount at any time, as long as the account is empty by the end of year 10.
- Exception: If the IRA owner had already started taking Required Minimum Distributions (RMDs) before they died, you may need to take annual RMDs during the first 9 years, then withdraw the rest by year 10. The IRS clarified this rule in 2024.
3. Special Rules for Eligible Designated Beneficiaries
If you are an EDB, you can usually stretch withdrawals over your own life expectancy instead of following the 10-year rule. Here’s how it works for each group:
- Surviving Spouse:
- You can treat the inherited IRA as your own, roll it over into your own IRA, or take distributions based on your life expectancy.
- If the IRA owner died before their Required Beginning Date (RBD), you can delay distributions until you reach RBD.
- If the owner died after RBD, you must take RMDs based on the longer life expectancy (yours or the deceased’s).
- Minor Child:
- You can take distributions based on your life expectancy until you reach the age of majority (usually 18, or up to 26 if you’re still in school).
- Once you reach the age of majority, the 10-year rule starts, and you must empty the account within 10 years.
- Disabled or Chronically Ill Person:
- You can take distributions over your own life expectancy.
- Person Not More Than 10 Years Younger:
- You can take distributions over your own life expectancy.
4. Gather Required Documents
You’ll need:
– Death certificate of the IRA owner
– IRA account statements
– Beneficiary designation form (shows you are the named beneficiary)
– Proof of relationship (for spouses, children, or those claiming EDB status)
– Proof of disability or chronic illness (if applicable)
– School enrollment records (for minor children over 18 but under 26 in school)
– IRS Form 5329 (for reporting missed RMDs or paying penalties, if needed)
IRS Form 5329
5. Set Up the Inherited IRA Account
- Contact the IRA custodian to set up an inherited IRA account in your name.
- The account should be titled with both the deceased’s name and your name as beneficiary (e.g., “John Smith, deceased, IRA FBO Jane Smith, beneficiary”).
- Make sure the account is set up correctly to avoid tax problems.
6. Plan Your Withdrawals
- Decide how much to withdraw each year, keeping in mind:
- Taxes: Withdrawals from traditional IRAs are taxable income. Roth IRA withdrawals are usually tax-free if the account was open at least 5 years.
- RMDs: If required, calculate your annual RMD using the IRS life expectancy tables.
IRS Life Expectancy Tables - Penalties: Starting in 2025, missing an RMD means a 25% penalty on the amount you should have withdrawn.
7. Report Withdrawals on Your Taxes
- Each year you take money out, you’ll get a Form 1099-R from the IRA custodian.
- Report the withdrawal as income on your tax return.
- If you miss an RMD, use Form 5329 to report and pay the penalty.
8. Keep Track of Deadlines
- 10-Year Deadline: Mark your calendar for the end of the 10th year after the IRA owner’s death.
- Annual RMDs: If required, set reminders to take your RMD each year by December 31.
- Age of Majority: For minor children, keep track of when you reach the age of majority or finish school, as this starts the 10-year clock.
9. Consult a Professional
- The rules can be tricky, especially if you have multiple beneficiaries, trusts, or special situations.
- Consider talking to a financial advisor or tax professional who understands inherited IRAs and the Secure Act.
Timelines and Costs
Timelines:
– Inherited IRA must be set up as soon as possible after the owner’s death.
– Withdrawals: All funds must be withdrawn by the end of the 10th year after the year of death (unless you’re an EDB).
– Annual RMDs: If required, must be taken by December 31 each year.
– Penalties: Starting in 2025, missed RMDs face a 25% penalty.
Costs:
– Taxes: Withdrawals from traditional IRAs are taxed as regular income.
– Penalties: 25% penalty on any missed RMDs starting in 2025.
– Account fees: Some custodians charge annual fees for inherited IRAs—ask your provider for details.
– Professional help: Fees for financial or tax advice vary.
Common Pitfalls to Avoid
- Missing the 10-year deadline: Failing to empty the account in time can lead to big tax bills and penalties.
- Not taking required RMDs: If you’re required to take annual RMDs and miss one, you’ll pay a 25% penalty on the missed amount.
- Not setting up the inherited IRA correctly: If you take a lump sum or roll the money into your own IRA (unless you’re a spouse), you could trigger immediate taxes.
- Confusing the rules for Roth and traditional IRAs: Roth IRAs have different tax rules, but the 10-year rule still applies.
- Not keeping good records: You’ll need proof of your status, withdrawals, and deadlines if the IRS asks.
- Assuming you’re an EDB when you’re not: Only certain people qualify for the special stretch rules—double-check your status.
Next Steps and Where to Get More Help
- Review your beneficiary status and determine which rules apply to you.
- Set up your inherited IRA account with the correct title.
- Plan your withdrawals to avoid penalties and manage taxes.
- Keep careful records of all paperwork, withdrawals, and deadlines.
- Consult a professional if you have questions or a complicated situation.
- Stay updated on IRS rules and deadlines, as they can change.
For the most up-to-date and official information, visit the IRS Retirement Topics – Beneficiary page. This resource explains the latest rules, deadlines, and forms you’ll need.
As reported by VisaVerge.com, the Secure Act’s changes to inherited IRAs have made it more important than ever for beneficiaries to understand their responsibilities and options. The IRS continues to update its guidance, so staying informed and seeking help when needed is the best way to avoid costly mistakes.
Frequently Asked Questions
Q: What is an inherited IRA?
A: An inherited IRA is an account you receive when someone leaves you their IRA after they die. You must follow special rules for taking money out.
Q: What is the Secure Act?
A: The Secure Act is a law passed in 2019 that changed how inherited IRAs work. Most beneficiaries must now empty the account within 10 years.
Q: Who is an eligible designated beneficiary?
A: This includes a surviving spouse, a minor child of the IRA owner, someone who is disabled or chronically ill, or someone not more than 10 years younger than the IRA owner.
Q: Do I have to take money out every year?
A: Not always. Most beneficiaries can take money out any time during the 10 years. But if the IRA owner was already taking RMDs, you may need to take annual withdrawals.
Q: What happens if I miss a withdrawal?
A: Starting in 2025, you’ll pay a 25% penalty on the amount you should have taken out.
Q: Are withdrawals from an inherited IRA taxable?
A: Withdrawals from traditional IRAs are taxed as income. Roth IRA withdrawals are usually tax-free if the account was open at least 5 years.
Summary Table: Key Points for Inherited IRAs After 2019
| Rule/Requirement | Details |
|---|---|
| Who is affected? | Anyone inheriting an IRA from someone who died after December 31, 2019 |
| Main rule | Must empty the account by the end of the 10th year after death |
| Exceptions | Eligible designated beneficiaries can stretch withdrawals over their life expectancy |
| Annual RMDs | Required for some, especially if owner was already taking RMDs at death |
| Penalty for missed RMDs | 25% penalty starting in 2025 |
| Taxation | Traditional IRA withdrawals are taxable; Roth IRA withdrawals usually tax-free |
| Required documents | Death certificate, beneficiary form, proof of relationship, IRS forms |
| Official resource | IRS Retirement Topics – Beneficiary |
Final Tips
- Act quickly: The sooner you set up your inherited IRA and understand your options, the easier it will be to avoid mistakes.
- Stay organized: Keep all documents and records in one place.
- Ask for help: Don’t hesitate to reach out to your IRA custodian or a financial advisor.
- Check for updates: IRS rules can change, so review the official IRS website regularly.
By following these steps and staying informed, you can handle your inherited IRA with confidence, avoid penalties, and make the most of your inheritance under the Secure Act.
Learn Today
Inherited IRA → An Individual Retirement Account received from a deceased person, subject to specific withdrawal rules.
Secure Act → A 2019 law altering inherited IRA rules, imposing a 10-year withdrawal limit for most beneficiaries.
Designated Beneficiary → A person named on an IRA as beneficiary, including spouses, children, and others.
Eligible Designated Beneficiary → Beneficiaries allowed to stretch IRA withdrawals over their life expectancy under the Secure Act.
Required Minimum Distribution (RMD) → The minimum yearly withdrawal amount required from inherited IRAs once distributions begin.
This Article in a Nutshell
The Secure Act redefined inherited IRA rules for deaths after 2019. Beneficiaries face a 10-year withdrawal deadline, except eligible designated ones who can stretch distributions. Understanding eligibility, deadlines, taxes, and penalties is crucial. Missing required withdrawals risks heavy penalties. Proper setup, record-keeping, and professional advice ensure compliance and maximize benefits under the new law.
— By VisaVerge.com
