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Exceptions To The New Rule On Inherited IRAs

Yet another new tax reform law went into effect in 2020 under the SECURE Act. In addition to ultra-high-net-worth individuals, the many millions of mass affluent Americans are likely to be impacted by the 470-page SECURE Act's retirement income tax provisions. The SECURE Act is a sweeping and substantive effort to make retirement income tax more sensible, a rare legislative action to win bipartisan support in Congress and the president's signature.

The new rules force heirs to withdraw everything from an inherited IRA over 10 years. Requiring heirs to deplete an inherited IRA over 10 years is a tax hike. Your IRA beneficiaries are no longer allowed to stretch out withdrawals over their expected lifespan.

Forcing heirs to pay tax on required distributions from an IRA over 10 years may result in your heirs paying additional income taxes annually during the 10-year withdrawal period. However, there are exceptions to the new 10-year rule for certain beneficiaries.

Spouses. Spouses can inherit your IRA with zero tax impact. A spouse who inherits an IRA is required to make withdrawals based on their actuarial life expectancy, which can be found in a table published by the IRS. Starting in 2020, a spouse who inherits an IRA may defer taking required minimum distributions (RMDs) until age 72 — not age 70½, as under the old law. An extra 18 months of tax deferral is significant. Deferring taxes for 18 months, when your IRA is hitting its peak value, lengthens the period of tax-free compounding just when a pre-retiree needs it. The stock market averaged a 3.9% quarterly return in the six quarters ended December 31st, 2019, despite a -13.5% in the fourth quarter of 2019, and no one can predict stock returns.

Minor Children of an Employee. Minor children of an employee who inherit a federally qualified retirement account, such as a 401(k), are exempt from the 10-year distribution rule. As long as the parent was an employee with a company's 401(k) plan, the child is not required to make distributions over 10 years.

Disabled. Disabled individuals who inherit an IRA are not subject to the 10-year required minimum distributions (RMDs) rule. Thus, they are eligible to take required minimum distributions based on more favorable terms.

Chronically Ill. Those suffering from a chronic illness are exempt from the 10-year rule.

Not 10 Years Younger. If an heir is not more than 10 years younger than the owner of the federally qualified plan account, the 10-year distributions rule will not apply.

The new RMD rules in the SECURE Act affect a hodgepodge of situations, reflecting Congress’s effort to make tax laws more compassionate and sensible. The specific situations are just one aspect of the SECURE Act’s wide-ranging effects. If you’re among the exceptions to the 10-year rule, please contact us with your questions.


This article was written by a veteran financial journalist. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.


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This article was written by a professional financial journalist for Neiman & Associates Financial Services, LLC and is not intended as legal or investment advice.

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