If you inherited an IRA within the last few years, you've been dealing with dramatically new beneficiary rules adopted under SECURE Acts 1.0 and 2.0.
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Here is something to think about: What happens when you, the beneficiary, pass away? What rules apply to a "successor beneficiary," someone who inherits the IRA from you?
To set the stage, we need to go back to the pre-SECURE rules for deaths that occurred before 2020, which are still in play for some taxpayers.
Take a reader I'll call Tom, who in 2018 at age 56 inherited his mom's IRA when she passed away at the age of 89. Her year-of-death RMD (required minimum distribution) was $16,667 based on her Dec. 31, 2017, IRA value of $200,000 and her divisor of 12.0 (Uniform Lifetime Table III, tinyurl.com/bnfwnebj).
When Tom inherited his mother's IRA, before the SECURE Act's changes took effect, he benefitted from a "stretch." Tom's divisor for his first RMD (2019) at age 56 was 28.7. Assuming a balance of $190,667 for Dec. 31, 2018, his 2019 RMD of $6,643 was quite a bit lower than his mother's last RMD of $16,667, based on her divisor. (I'm using Brentmark Inc.'s financial software for these calculations.)
SECURE Act changes did not affect his RMDs. He continues to take them under the old rules during his lifetime.
Tom wants to know: "If I pass away and my wife inherits the IRA from me, does she continue the stretch since it was originally pre-2020 and she is a spouse, or does she do the new 10-year payout scheme?" I asked Mark Luscombe, principal analyst at Wolters Kluwer Tax and Accounting, to share his expertise.
Tom's wife ("May") is a successor beneficiary. She will be "required to do a 10-year payout" under SECURE Act rules, according to Luscombe. Since the original IRA owner (Tom's mother) was already taking RMDs when she died, Tom's successor beneficiary (May) would be required to make RMDs each year over the 10-year period (2036) measured by Tom's date of death (let's assume he dies in 2026), instead of being able to wait until 2036 to empty the IRA.
Here is another wrinkle: You might think that a spouse can treat her inherited IRA as her own, but that is not the case if the spouse is a successor beneficiary. "The special rule for spouses of an IRA owner does not apply to spouses of an inherited IRA owner," explained Luscombe.
Those "special rules," as detailed in IRS Publication 590-B (tinyurl.com/47h9utkb), include treating the deceased spouse's IRA as your own by designating yourself as the account owner or by rolling it over into your own IRA.
One final question about the new rules: When does the yearly RMD rule not apply to a successor beneficiary?
Take this example: "June" dies in 2022 at age 50, well before her RMD age (73). "Andy," her beneficiary, dies in 2023. "Cindy" is the successor beneficiary.
When an IRA owner's death occurs before RMD age, the 10-year rule starts a countdown based on the IRA owner's death, and the entire IRA balance must be withdrawn by the end of the 10-year period, explained Luscombe.
Since June died in 2022, Cindy would have to empty the inherited IRA by the end of 2032. For Cindy, there is no requirement that money be withdrawn each year, although that's always an option.
As you can see, RMD answers depend on the precise set of circumstances. You'll need expert tax advice that applies to your situation. Wolters Kluwer's expert insights are subscription-based. See tinyurl.com/mt2m84vp.
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