The Secure Act has brought significant changes to the rules surrounding inherited IRAs, particularly the elimination of the stretch IRA for most beneficiaries. Now, non-spouse beneficiaries must adhere to a new 10-year payout rule, which requires them to empty the inherited IRA balance within ten years. While spousal beneficiaries can still benefit from the stretch IRA, the majority of non-spouse beneficiaries will be subject to the new rules.
It is crucial for beneficiaries to understand what type of beneficiary they are in order to determine the appropriate payout rule to follow. Under the Secure Act, there are three categories of beneficiaries: non-designated beneficiaries, non-eligible designated beneficiaries, and eligible designated beneficiaries. Eligible designated beneficiaries are still eligible to use the stretch IRA, while others will have to adhere to the 10-year rule.
There are three common inheritance mistakes that beneficiaries should avoid when dealing with an inherited IRA. Taking a lump-sum distribution can result in substantial tax consequences, potentially losing a significant portion of the inheritance to taxes. In addition, spouses inheriting an IRA have several options to consider, including a spousal rollover, stretch IRA, or the 10-year rule. Mixing pre-2020 rules with Secure Act rules can also lead to confusion and potentially costly mistakes.
Eligible designated beneficiaries must be aware of their status and the benefits available to them under the stretch IRA. This distinction is crucial in determining the correct withdrawal schedule and minimizing tax implications on the inheritance. Seeking the guidance of a Certified Financial Planner and tax professional can help beneficiaries navigate the complexities of inherited IRAs and develop a plan to reduce tax liabilities on the inheritance.
Overall, the changes brought about by the Secure Act have significant implications for beneficiaries of inherited IRAs. Understanding the new rules, determining the appropriate payout schedule, and seeking professional guidance are essential steps in maximizing the benefits of an inherited IRA and minimizing tax consequences. Beneficiaries should take the time to educate themselves on the options available and make informed decisions to protect their inheritance.
