Recently, the IRS confirmed the requirements for beneficiaries to take RMDs from inherited IRAs. One of the biggest changes in the last several years is the shift from beneficiaries "stretching" distributions over the course of their lives to distributing the account in 10-years. The 260-page document posted by the IRS clarifies the guidance from the SECURE Act of 2019 regarding beneficiaries.
When it comes to inheriting a traditional IRA, two key details are important to know: the type of beneficiary and how old the decedent was at the time of their passing. The type of beneficiary matters because it determines the options available to them. To start, there are either non-designated beneficiaries or designated beneficiaries. A non-designated beneficiary is a non-person entity, such as an estate, charity, or nonqualified trust, which receives an inherited IRA. Non-designated beneficiaries have no life expectancy of their own, unlike individuals who are designated beneficiaries. A designated beneficiary is a person or entity that is named to receive the benefits of an IRA after the account owner's death. They are also known as named beneficiaries. For purposes of this blog, we’ll now dive a little deeper into the designated beneficiary.
There are two classifications of designated beneficiaries: "Eligible Designated Beneficiary" and "Non-Eligible Designated Beneficiary." Eligible Designated Beneficiaries include the following:
Non-Eligible Designated Beneficiaries are most non-spouse beneficiaries and those who do not qualify as one of the above types.
Once you determine who is receiving the IRA, the next detail to clarify is how to handle the distributions. It’s crucial to identify whether the decedent passed away on or after, or before, their 73rd birthday. There are three options for designated beneficiary distributions: "stretching" the benefits, the 10-year rule, or combination of the two. Stretching benefits means a beneficiary takes over the RMD distribution over the course of their own life or what could have been the decedent’s life, whichever is longer. The 10-year rule requires the beneficiary to fully distribute the account by the end of the 10th year after the date of death.
Once we know who is inheriting the IRA and how old the decedent was, we are presented with four possible scenarios for a designated beneficiary. Keep in mind, there are also some nuances regarding when these stretch rule distributions must start and when the 10-year clock starts as well.
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