The SECURE Act – Changes to Regulations for Distribution of Inherited IRAs
Effective January 1, 2020, the SECURE Act changes the requirements for distributions of retirement accounts. The most significant change related to inherited IRAs is the elimination of the ‘stretch’ IRA. Previously, beneficiaries of inherited IRAs could take minimum distributions based on the beneficiary’s life expectancy. For younger beneficiaries, in particular, this allowed the beneficiary to take smaller required distributions, allowing more of the IRA to grow tax-deferred during his or her lifetime. Now, under the SECURE Act, an inherited IRA must be distributed within 10 years of the account owner’s death, with some exceptions. There are no required minimum annual distributions within the 10 years, so a beneficiary can decide to spread distributions out over the 10 years, or wait until the end of the 10 year period to distribute the entire account.
The new distribution rules apply to IRAs owned by decedents who die after January 1, 2020. The previous rules still apply to the distribution of IRAs inherited from owners who died before January 1, 2020.
There are some exceptions to the 10-year distribution requirement for certain beneficiaries. Spouses, disabled persons, chronically ill persons, and beneficiaries who are less than 10 years younger than the account owner can still take minimum distributions based on the beneficiary’s life expectancy. Minimum distributions to minor children are also still based on the child’s life expectancy, but only until the child reaches the age of majority, at which time the 10-year rule applies.
In addition to the changes affecting beneficiary distributions, the SECURE Act also changes some of the rules for contributions and distributions to the account owner during his or her lifetime. Under the prior rules, minimum distributions were required to begin in the year following the year the account owner turned age 70½. Now, minimum distributions are not required until the account owner turns age 72. There is also now no longer an age limitation on contributions to an IRA, meaning the account owner can continue to make contributions at any age provided the income requirements are met.