facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Inherited IRAs: SNAFU Thumbnail

Inherited IRAs: SNAFU


Whenever you're dealing with inherited IRAs, it is important to remember that you have a high probability of doing something wrong. In the realm of individual taxation, I'm convinced the rules covering inherited IRAs are more complicated than any other issue. And in typical fashion the IRS has proposed making the rules even more complicated.

Secure Act Changed Rules for Inherited IRAs

The SECURE Act became law in 2019 and it significantly changed retirement accounts in general. One area of change is the treatment of inherited IRAs. Under old law most people who inherited an IRA could stretch the withdrawals over their expected lifespan. The SECURE Act changed that, and said, in most cases (spouses are one notable exception), IRAs inherited in or after 2020 must be empty in 10 years. The consensus was that this meant that the person who inherited the IRA could wait until year 10 and take the entire amount out of the IRA (of course he or she could also take funds out earlier). In fact, the IRS Pub covering inherited IRAs was changed to reflect this interpretation.

Enter IRS Regulations 

The IRS writes regulations to implement the Internal Revenue Code (IRC). And like most government regulations, there is an approval process, including public comment, that the proposed regulation must go through prior to becoming a regulation. The IRS proposed regulations covering the SECURE Act earlier this year and they were a surprise to many of us. This is what the proposed regulations say for inherited IRAs that don't meet one of the exceptions

  • If the IRA owner dies after his or her Required Beginning Date (RBD. Age 72 as a result of the SECURE Act) the person who inherits the IRA must take a Required Minimum Distribution (RMD), based on his or her age, for the first 9 years after death and empty the account out in year 10. Of course, larger distributions are allowed.

  • If the IRA owner dies before the RBD, then the account just has to be empty by the end of year 10. There are no RMDs.

Public comment on the regulations was completed in June.

What to Make of It? 

First of all, proposed regulations aren't binding. So, until the regs are finalized you're not required to do anything. But...the regulation, when finalized, could apply back to the effective date of the law. I'm hoping the IRS has more sense than that and they provide relief for those who acted in good faith by following the IRS Publication. With that said, there is long-standing precedent in the courts that IRS Publications are not binding on the IRS, if the Publication conflicts with the language of the law. If you inherited an IRA in 2020 (the first year the law applied), I don't think I'd do anything with your 2021 tax return...yet. Wait and see if the IRS provides relief. If you inherited an IRA in 2021 or 2020, I'd keep an ear to the ground on this issue and see if you need to take an RMD this year.

Military Finances are Different

While this issue pertains to anyone who inherits an IRA there are a lot of things (like SBP, VA Disability Compensation, State taxation of your military pension) that pertain only to active and retired military members. If you're an Active or Retired Senior Military Officer or NCO, we think you should work with a specialist. If you'd like to hear about how we do things, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 401: The Widow(er)'s Penalty

Watch Out for this Tax Tripwire

Military Tax Benefit: Rollover of SGLI Proceeds to a Roth IRA

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.