Inherited retirement plans fall under different RMD rules, even if they are Roth IRAs. For any decedent who passed away before 2020, the lifetime distributions generally apply to the beneficiary. However, legislation included in the SECURE and SECURE 2.0 Acts, require that the IRAs be distributed by the end of the 10th year following the death of the IRA owner, with some exceptions.
The exceptions to the ten-year rule as defined by the IRS includes the decedent’s spouse, minor child, a beneficiary who is not more than 10 years younger than the original IRA owner, or someone who is either disabled or chronically ill.
Surviving Spouse:
A surviving spouse who is the sole beneficiary has several options available regarding the inherited IRA. They are allowed to roll over the IRA to their own IRA and won’t have to begin RMDs until they reach the age of 73. The spouse can also choose to keep the IRA as an inherited IRA, in their name, and can choose from the following: delay taking RMDs until the late spouse would have reached their RMD age or the surviving spouse can begin taking RMDs the calendar year that follows the year of the spouse passing away. If the last option is selected, and the spouse passed away before reaching the RMD age, the surviving spouse can base their RMDs on the longer life expectancy between themselves or their spouse’s life expectancy.
Designated Beneficiaries:
The other eligible designated beneficiaries as stated above must move the inherited asset into their own IRA in their name. According to the IRS rules, non-spouse eligible designated beneficiaries who inherit an account from someone who was already taking RMDs will be required to take distributions each year, commencing in the calendar year following the account owner’s death, and then continue to take them until the account is depleted by the end of year ten. If the original owner had not begun RMDs, the beneficiary must withdraw the balance by December 31 of the year that marks the 10th anniversary of their passing. A minor child will be required to withdraw the funds based on a life expectancy up to age 30 and withdraw the remaining balance by December 31 of the year they turn 31.
On the other hand, if the original IRA account owner had not yet been obligated to take distributions, the non-spouse beneficiary will not be required to take an annual distribution. This could be helpful to the beneficiary if they wait until they are in a lower tax bracket to take the distribution later in the 10-year window. Note that any taxes on the IRA distributions that would have been owed by the deceased will now be owed by the beneficiary.
Inherited Roth IRAs:
Contributions to Roth IRA are after-tax dollars, making them a more favorable inherited account. New rules in the SECURE Act and the SECURE Act 2.0 allow spouses, minor children of the deceased, those disabled or chronically ill, or those who aren’t more than 10 years younger than the deceased, to keep the Roth IRA longer than 10 years. However, the 10-year period to deplete the inherited Roth IRA applies to all non-qualifying heirs. In addition, if the original owner first funded a Roth IRA less than 5 years before death, the beneficiary needs to wait until the five-year period is met to get tax-free earnings.