The nitty gritty on inheriting IRAs

The nitty gritty on inheriting IRAs

February 18, 2022

A couple of years ago, Congress passed a law called the “Setting Every Community Up for Retirement Enhancement” Act. It is an awkward name, selected with some malice aforethought, to fit the acronym the bill sponsors really wanted—the SECURE Act. It passed both houses of Congress with nary a dissenting vote and was signed into law on December 20, 2019.

Among other things, the SECURE Act made significant changes to the way IRAs and other retirement plan accounts are inherited. The rules are pretty complex, but I will try to summarize some key elements here. If you have questions about how your IRA will be treated upon your death, I encourage you to speak with an advisor who has experience with these arcane rules.

The SECURE Act divides retirement plan beneficiaries into three types. Each type inherits differently. The three types are designated beneficiaries, eligible designated beneficiaries, and non-designated beneficiaries.

Designated beneficiaries must be individuals or see-through trusts. Designated beneficiaries are governed by the 10-year rule which says that all funds from an inherited IRA must be withdrawn by the end of the year that contains the tenth anniversary of the decedent’s death. No distributions are required before the end of the tenth year. This rule applies to both traditional and Roth IRAs. The only difference is that distributions from a traditional IRA are taxed as ordinary income while the distributions from a Roth IRA are tax-free.

Eligible designated beneficiaries are designated beneficiaries, including the named beneficiaries of see-through trusts, that fall into at least one of the following categories: the decedent’s surviving spouse, the decedent’s minor children, disabled or chronically ill individuals, or individuals who are not more than 10 years younger than the decedent.

The rules for a surviving spouse are little changed from before the SECURE Act. A surviving spouse can still elect to roll inherited benefits into his or her own IRA or to treat the decedent’s IRA as their own. They can also elect to be treated as the beneficiary of an inherited IRA with one additional perk available only to inheriting spouses—they can defer taking any required minimum distributions until the year in which the decedent would have reached age 72. Once they start taking RMDs, the RMD is recalculated annually.

In contrast, other eligible designated beneficiaries must start taking distributions by December 31 of the year following the IRA owner’s death. RMDs are calculated based on the life expectancy of the eligible beneficiary in the calendar year following the year of death. The life expectancy is reduced by one in every succeeding year.

Eligible beneficiaries who are minor children of the decedent have some special considerations under the SECURE Act. The SECURE Act stipulates that these beneficiaries can be paid out based on the child’s life expectancy until the child reaches the age of majority. However, there is some ambiguity as to what it means for a child to have “reached majority.” For example, in some states the age of majority is age 18; in other states, age 21. There are other ambiguities, too, leading Natalie Choate, a well-known expert on retirement plans, to opine that “[the SECURE Act] does not provide a nationally applicable bright line framework for determining what ‘attaining majority’ means.” In any case, as soon as the age of majority is achieved, the child is no longer an eligible designated beneficiary and the account must be emptied by the end of the tenth anniversary of the child reaching the age of majority.

Non-designated beneficiaries include non-person entities such as the decedent’s estate, a charity or another organization, or a trust that does not qualify as a see-through trust. The inheritance rules for non-designated beneficiaries are the same now as they were before the SECURE Act and depend upon the decedent’s age at the time of death. If the IRA owner dies before age 72, the non-designated beneficiary is required to empty the account within five years of the date of death. If the IRA owner dies after age 72, the non-designated beneficiary may stretch distributions out over what would have been the decedent’s remaining life expectancy if he or she had not died. Of course, that is the minimum required distribution. The non-designated beneficiary can always distribute the money more quickly.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to