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What Happens if You Inherit an IRA from someone other than your Spouse?

July 14, 2022

Special rules apply when you inherit an individual retirement account (IRA) from someone other than your spouse. The SECURE Act changes these rules. Proposed regulations could change these further. Read on.

*Editor’s Note: This blog has been updated as of July 2022 for accuracy and comprehensiveness.

Surviving spouses have several tax-advantaged options when they inherit an individual retirement account (IRA) from a deceased spouse. However, different rules apply when someone other than the account owner’s spouse inherits an IRA. Here’s more on the rules for non-spouse IRA inheritances and how the SECURE Act has impacted the rules.

Non-spouse beneficiaries—what you should know

Are you the son, daughter, brother, sister or close friend of an IRA owner who has named you their beneficiary? Unlike spouses, “non-spouses” can’t make contributions to an inherited IRA or rollover the assets into their own IRA.

Prior rules

Under previous guidance, non-spousal beneficiaries had a few options…

  • Cash out the IRA by December 31st of the 5th year following the account owner’s death,
  • Opt to take required minimum distributions from inherited IRAs over their life expectancy, instead of taking all the money within five years.
  • Opt to take RMDs over the life expectancy of the oldest beneficiary of the IRA if the account owner named more than one beneficiary, and separate inherited IRA accounts aren’t established for each beneficiary by December 31st of the year following the account owner’s death
  • Cash out the IRA immediately

2020 SECURE Act Changes

The Setting Every Community Up for Retirement Enhancement, SECURE Act changes the age at which you must begin taking required minimum distributions (RMDs) from tax-favored inherited retirement accounts (IRAs, SEP accounts, 401k, etc.). Check out our blog on this, but from January 1st 2020 and on, the RMD age changes from 70 ½ to 72.

The 10 year Rule

If the original IRA owner died on or after January 1, 2020, the SECURE Act requires beneficiaries to withdraw all assets from an inherited IRA or 401(k) plan by December 31 of the 10th year following the IRA owner’s death.

*Note- The IRS issued proposed regulations in February 2022 that indicate taxpayers cannot wait until the 10th year to take distributions if they inherited an IRA from someone who already passed the effective RMD date. Instead, distributions must be made annually in the 1st through 9th years following the IRA owner’s death and all of the inherited IRA assets must be withdrawn by the end of the 10th year. The IRS went back and forth on the requirement for annual distributions when it published IRS Publication 590-B in 2021, and the proposed regulations include a position that conflicts with the publication’s most recent update. We will continue to monitor this as the IRS issues further guidance.

Planning opportunity: You could actually take that money out and put it into a whole life insurance policy, either on yourself, your children or your grandchildren. The benefit here is that the benefits will continue to grow tax-deferred. If it’s structured properly, those beneficiaries can actually get money out of that policy on a tax-free basis.

Untangling the Web

The rules for inherited IRAs are complicated and strict. Contact our tax team to help you make the best choices for your circumstances.

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