My last blog covered the new rules around inheriting investments as a spouse, per the SECURE Act of 2019. Now we turn to non-spouse beneficiaries (e.g. children, siblings) and it gets even more complicated, particularly when it comes to inheriting IRA’s. Note that there is typically no difference when it comes to inheriting non-retirement investments.
Eligible Designated Beneficiaries
Non-spouse beneficiaries of an IRA have more options if they are determined to be Eligible Designated Beneficiaries. A non-spouse beneficiary will qualify for this status if:
- They are minor children of the deceased.
- They are chronically ill or permanently disabled.
- They are not more than 10 years younger than the deceased.
In these cases, the eligible non-spouse beneficiaries will have the following options with the IRA accounts that they have inherited:
- Open an Inherited IRA and start taking Required Minimum Distributions (RMD’s) in the year following death. The RMD’s are based on the age of the beneficiary, and no early withdrawal penalties will apply.
- Open an Inherited IRA and empty the account within 10 years (if the decedent was < 72 years old at death). No RMD’s are required as long as all money has been withdrawn by the end of the 10th year following the year of death. Also, no early withdrawal penalties will apply.
- Take a lump sum payment to cash out the account. Be aware of taxes due, but no early withdrawal penalties should apply.
Non-Eligible Designated Beneficiaries
If you do not meet the requirements to be considered an Eligible Designated Beneficiary, then all inherited accounts will need to be emptied by the end of the 10th year after the year the accountholder died.
The rules are complicated, and getting them wrong can have significant consequences. For example, the penalty for missing an RMD is 50% of the size of the missed RMD payment which can mean thousands of dollars for many people. So, consult with your finance and tax professionals regarding how to handle your inheritance.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.