Taxpayers who inherit an individual retirement account from someone other than their spouse have received a reprieve this year. Last week’s IRS announcement grants IRA beneficiaries a fourth year of relief from mandatory withdrawals based on changes in the tax law contained in the Secure Act of 2019.
The sweeping act embodies the most significant enhancements to retirement saving since 2006. But as usual, the devil is in the details, some of which are still unresolved four years hence.
Congress included bipartisan retirement account reforms as a piece of a massive appropriations bill to fund the government for 2020. The Secure Act expanded 401(k) access to part-timers, increased the age for beginning required distributions and lowered the penalty for missing a withdrawal. The act also eliminated the choice for non-spousal IRA inheritors to spread out depletion of the account over their own lifetime, referred to as a “stretch” option, and also extended the existing alternative five-year withdrawal option to 10 years.
Evidently discerning that the existing rules were insufficiently opaque, Congress created a whole new class of IRA beneficiaries called eligible designated beneficiaries, including spouses, minor children of the owner (until they reach 21) and certain people with disabilities or chronic illnesses. The designated beneficiaries retain the stretch option, as does any inheritor who is less than 10 years younger than the deceased owner. For everyone else, the rules changed.
So now, if you inherit an IRA and are not a spouse or a designated beneficiary — an adult offspring for example — you are required to fully deplete the account within 10 years. That is still a pretty sweet deal by any measure.