Beneficiary IRA Has New Rules You Need to Know About In 2020

The Beneficiary IRA Has New Rules You Need to Know About In 2020
By Bob Mason, CPA of TaxBuzz – 30NOV2020
IRAs have a well-deserved reputation as an excellent way to build wealth, but for those
who have inherited a beneficiary IRA, some of the traditional benefits of IRAs have been
mitigated with the passage of the SECURE Act. The new law made significant changes
to the amount of time that those inheriting IRA funds have available to disperse its
holdings, and this is likely to drive tax liabilities up. If you have inherited a beneficiary
IRA or believe that you may in the future, it is essential that you understand the impact
of the new rules: getting the wrong information or misunderstanding what needs to be
done can lead to unnecessarily paying far more in taxes than is necessary.
How Beneficiary IRAs Used to be Handled
Prior to the passage of the SECURE Act, when a person died and included an individual
retirement account as part of their estate, the beneficiary who received the account was
able to spread out the required annual withdrawals from that account over the course of
their entire lifetime. Not only did this permit the funds in the account to continue growing
tax-free for an extended period of time, but also allowed them to be strategic with the
amount of taxes that they owed each year, withdrawing larger sums in years when their
tax rate was lower.
How Beneficiary IRAs are Handled Now
The new SECURE Act rules apply to Roth IRAs as well as traditional IRAs, and to preand
post-tax 401(k) accounts. With its passage, many of those who inherit these types
of accounts have found themselves facing a new reality as the window in which they
can withdraw money has been limited to just ten years. This eliminates the ability to
stretch their disbursements as they once could, and not only cuts the growth potential
for the assets held in the accounts, but also boosts the taxes that will need to be paid on
funds dispersed from large 401(k)s or IRAs.
The Silver Lining of the SECURE Act
Though the new beneficiary IRA rules will disadvantage many, there are a few positives
for those who fear that they will be impacted by the reduced period of time available for
disbursements and growth. First, it is important that those who inherited retirement
accounts prior to January 1 st of 2020 to know that they will not be impacted by these
changes, as they will still have the same abilities that they once had.
Additionally, there are some who are excused from the new limitations based on their
age or relationship to the person from whom they inherited the IRA or 401(k). Those
who inherited the account from their spouse can rollover the funds into their own

account and then calculate their required minimum distributions over their lifetime, as
was previously true. The same holds for people afflicted with chronic illnesses or
disabilities, as well as for beneficiaries less than ten-years younger than the person
from whom they inherited the account: this exception is generally appropriate for life
partners, non-married significant others and siblings.
Children who receive a beneficiary IRA when they are minors are able to postpone the
ten-year clock, allowing the money to grow until they reach the age of majority in their
state at which time the 10-year clock starts running. To be clear on whether these
exceptions apply to your situation, it is important that you confirm with a financial or tax
advisor, otherwise you risk failing to take dispersals that you are required to, leaving you
subject to costly penalties.
If you have inherited (or anticipate inheriting a 403(B) or 457(b) plan from a government
or nonprofit worker, or a federal Thrifst Savings Plan (TSP) from a retired federal
employee, the shift in the beneficiary IRA rules won't affect those accounts until the year
2022, so you will still be able to base dispersals on your anticipated lifespan.
Though many are disappointed by the new rules, there are very real advantages to
being able to avoid a required minimum distribution and instead being strategic about
when and how to liquidate the funds. Since there is a ten-year window for managing the
monies inherited in the beneficiary IRA, you can time dispersals to when your income
and associated tax rate is expected to be lower. Those who have inherited since
January 1 st of this year — and whose income has dropped as a result of the pandemic
— may want to withdraw money this year, not only to offset needs driven by having
been furloughed, terminated, or seeing revenues in their own businesses or income fall,
but also because their tax rate will likely be lower as a result of those economic impacts.
One way or another, inheriting money is a gift, and if you are strategic it can be a gift
that keeps on giving, even with the changes to the rules about beneficiary IRAs. For
information about how best to use the funds you've received, make an appointment with
your financial or tax planner.