Military Finances 401: Finally, Final Regulations for Inherited IRAs
Retirement Funding TaxesSECURE Act
The original SECURE Act passed in December of 2019 and went into effect in 2020. The Act significantly changed how inherited IRAs are treated by the Code. In typical Federal Government form the IRS took 3 ½ years to publish final regulations concerning this change in the law. This caused a lot of confusion and even the IRS realized that they had some issues, and they waived the requirements of the law until publishing the final regulations (not sure where they get that authority…but I’ll take it). Even with publishing the rules this year (2024), they don’t go into effect until 2025. That’s good, because this is complicated. Let’s take a look.
Non-Eligible Beneficiaries
Non-eligible beneficiaries are pretty much everyone other than spouse beneficiaries. The SECURE Act stated that rather than withdrawing from the IRA based on the beneficiary’s life expectancy, the account must be empty by the end of the 10th year after the year of the owner’s death. This left a lot of room for interpretation The final regulations should put most of the speculation to bed.
Account Owner Dies Prior to Required Beginning Date (RBD). As you probably know, pre-tax (traditional) accounts have an age at which you are required to start taking distributions, the RBD. The RBD varies depending on when the owner was born. For those who haven’t already hit the RBD, it is 73 if you were born in 1950 or later, or 72 if you were born after 1948 and before 1950.
If the account owner dies prior to the RBD, then the beneficiary(ies) must empty the account within 10 years after the date of death. You can literally wait until the last day and take it all out. Of course, this may not be a good idea as it could push you into a higher tax bracket or increase your Medicare premiums.
Account Owner Dies After RBD. In this case there are two rules. The beneficiary must take out annual Required Minimum Distributions (RMD) based on the life expectancy of the beneficiary (the same as prior to the SECURE Act) AND empty the account out by the end of the 10th year after death.
Something to also keep in mind is one or all of the beneficiaries must take the account owner’s RMD in the year of death if the account owner hadn’t already done so. The RMD can be split amongst account beneficiaries however they see fit (in most cases).
Accounts with no RBD. What about an account without an RBD, such as a Roth IRA? Since a Roth IRA doesn’t have an RBD, the empty in 10 rule applies and no annual withdrawals are required. The same can apply for employer accounts (401(k), 403(b), TSP) IF the entire plan balance is Roth (an unlikely event especially if matching is involved). If even $1 is pre-tax then the RBD rules apply. Sounds like a pretty good reason to move Roth funds out of employer plans.
Eligible Beneficiaries
In most cases, we’re talking about spouses when we’re talking about eligible beneficiaries. Spouses generally have 3 choices.
- Roll the inherited IRA into an IRA in his or her name and become the owner of the IRA
- Leave it as an inherited IRA and make withdrawals over his or her lifespan
- If the owner of the IRA dies prior to RBD, use empty in 10 rules
Case #3 brings up a unique situation. If both spouses are 70 and the husband dies that year, the wife could elect to take no distributions for up to 10 years and thus avoid RMDs from age 73 (or 72) until age 81. The wife also has the choice to convert that IRA to her own at any time during those 10 years.
The IRS didn’t like that, so they invented a requirement that doesn’t exist anywhere in the statute. That requirement is a Hypothetical RMD. In essence, it requires a spouse that does elect to use the empty in 10 rule and then later decides to roll the inherited IRA into his or her own IRA to take the RMDs that would have been required to take if the IRA was his or hers.
Simple Stuff
I’ve just scratched the surface of what is in the 260 pages that lay down these rules (and other requirements). The people that teach academics to advisors will make some money on this (in fact, I’m taking my first class on Today), and advisors (especially tax advisors) will need to worry less that computer software will put us out of business. So, thanks IRS, I guess?
Military Finances are Different
The inherited IRA rules apply equally to civilians and active and retired military members. That isn't always the case. If you're an Active or Retired Senior Military Officer or NCO, you have unique tax benefits and financial opportunities that aren't available to your civilian counterparts. That's why we think you should work with a financial advisor or planner that deals with Senior Military Officers and NCOs each and every day. If you'd like to find out how we work with people like you, use the button below to schedule a free-initial consultation.
If you found this article useful, you might like the following blog posts:
Military Finances 301: Mom (or Dad) Missed Her RMD. Now What?
Military Finances 101: Could Custodial IRAs Help Young Adults Buy Homes?
Military Finances 101: Should I Use My Roth IRA as an Emergency Fund?