The world of inherited Individual Retirement Accounts (IRAs) is undergoing a sea-change. These transformations won’t be fully rolled out until 2025. These changes, a result of the SECURE Act, create new challenges that beneficiaries need to navigate to make the most of their financial plans. Financial advisors are keenly aware of these shifts and are working diligently to guide their clients through the intricacies of the new regulations. Our mission is to demystify these changes, providing the facts and informed strategy to equip people and businesses to get ready in a smart way.

Understanding the SECURE Act and its Impact

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into law. Among other things, it made major changes to the rules surrounding inherited IRAs. A key change is the removal of the so-called “stretch IRA” for most non-spouse beneficiaries. Before, most beneficiaries could stretch distributions over their expected life span, sometimes deferring that money—and the taxes due on it—for decades. Beginning in 2020, the SECURE Act mandates that non-spouse beneficiaries remove the full inherited IRA balance. They have to make this withdrawal within a ten-year period after the original account owner dies. This shift can have the effect of raising the overall tax burden. It’s even worse and counterintuitive if the beneficiary is subject to a very high income tax rate.

The 10-Year Rule and RMD Implications

The SECURE Act says that the whole account balance must be paid out within a maximum of ten years. At first, there was a fair bit of confusion regarding Required Minimum Distributions (RMDs) over that period. The IRS first waived required minimum distributions (RMDs) in 2021 and then again in 2022. They have, since that first proposal, reiterated that RMDs will apply annually beginning in 2025 for beneficiaries subject to the 10-year rule. Beneficiaries are required to empty the account within 10 years. They have to begin taking annual required distributions based on their life expectancy, which can greatly increase the effect of the tax. These rules are extremely important to understand — even more so for beneficiaries who inherited IRAs after the year 2019. They must navigate the annual RMDs — while sticking to the 10-year distribution rule.

Spousal Beneficiaries and Their Options

Spouses have much more flexible options when inheriting IRAs than non-spouse beneficiaries. They can choose to:

  • Treat the IRA as their own: This involves retitling the account in their name and treating it as if it were their original IRA. Unlike the first option, this second option allows the surviving spouse to delay distributions until their own RMD age of 73.

  • Roll the assets into their own IRA: This achieves a similar outcome to treating it as their own, providing the same tax deferral benefits and flexibility.

  • Maintain the IRA as an inherited IRA: In this case, the spouse becomes the beneficiary and must take distributions based on their life expectancy.

Married and spousal beneficiaries should be especially mindful of RMDs. This is even more critical if they’ve already hit RMD age. Speaking with a financial advisor can guide married couples on the most beneficial strategy to take based on their unique situations.

Strategies for Navigating the New IRA Landscape

The SECURE Act has certainly added to the complexities that financial advisors are facing, but they’re meeting the challenge. Here are their 7 biggest strategies to ensure clients and their beneficiaries can thrive through the approaching 2025 RMD changes. All of these strategies are designed to reduce tax burdens and maximize the benefits of inherited IRAs.

Pre-Death Planning Strategies

Among the most proactive steps, can be taken is to plan for the tax consequences that may affect beneficiaries before you die. This involves strategies such as:

Roth IRA Conversions: Converting traditional IRA assets to a Roth IRA can be a powerful tool. The conversion is a taxable event. As long as the Roth IRA owner has had the account open for at least five years, all future Roth distributions—including those taken by inherited IRAs—are typically tax-free. This can create meaningful tax savings for beneficiaries, particularly those beneficiaries that may be in higher tax brackets.

  • Diversifying Retirement Savings: Directing retirement savings into a mix of accounts with different tax treatments can be beneficial. This means taxable accounts, Roth accounts, and tax-deferred accounts. By lowering the concentration of assets in tax-deferred accounts, taxpayers can minimize their beneficiaries’ potential tax liabilities.

Regularly reviewing and updating beneficiary designations is crucial. Tip #7 — Ensure you expressly identify the intended beneficiaries. Failure to coordinate this with the individual’s wider estate plan will leave the assets open to undesirable outcomes and ensure that the asset transfer will not be seamless.

Post-Inheritance Strategies for Beneficiaries

If you’re the beneficiary of an inherited IRA, you have a few different choices to make. Each of these options has different implications.

  • Withdraw the Money Over 10 Years: Beneficiaries can choose to withdraw the money over a period of as long as 10 years, using the IRS' single life expectancy tables to determine the required minimum distributions. This strategy allows for a slow and steady release of assets. This is because it can help avoid the entire tax impact of a lump-sum withdrawal.

If the original account owner was of RMD age, beneficiaries can use the life expectancy method to calculate their required minimum distributions, which may provide a longer time window for withdrawals. This approach can be especially beneficial for older beneficiaries or those who want a longer distribution period.

If the client is financially secure and wants to avoid potential tax consequences of the additional income, disclaiming the IRA may be a smart option. By disclaiming the IRA, the assets pass to the next designated beneficiary, potentially shifting the tax burden to someone in a lower tax bracket.

Rolling the Assets into Their Own IRA: If the client is past age 59 1/2, rolling the assets into their own IRA may be a good option, as it allows them to consolidate their retirement accounts and potentially reduce fees. This flexibility is typically only afforded to those who take a spousal inheritance of an IRA.

Navigating RMDs and Seeking Professional Advice

One of the most critical aspects of managing an inherited IRA under the SECURE Act is understanding and complying with RMD rules. While the IRS has released helpful guidance on how to calculate RMDs, the process can be complicated. Now more so with the 2025 changes.

  • Consulting a Tax Advisor: Financial advisors strongly recommend that beneficiaries consult with a qualified tax advisor to determine the correct RMD schedule and ensure compliance with all applicable regulations. A tax professional can provide customized advice, focusing on the unique circumstances of each beneficiary. They are also strategic advisors who help clients understand the intricacies of the tax code.

Given the evolving nature of the rules surrounding inherited IRAs, it is essential to stay informed about any further updates or clarifications from the IRS. Financial advisors closely monitor these developments and can provide clients with timely updates and guidance.

Case Studies and Examples

To illustrate the impact of the SECURE Act and the 2025 RMD changes, consider the following case studies:

Case Study 1: The Impact on a High-Income Beneficiary

Take our hypothetical, high-income, working professional Sarah, who inherited a $500,000 traditional IRA from her father in 2022. Under the SECURE Act, she would have to take out the whole amount over ten years. Originally, she was going to make those distributions bigger in future years, assuming she would have less income once she retired. Thanks to the 2025 RMD changes, now she needs to take regular annual distributions based on her life expectancy. This new development might force her into a significantly higher tax bracket. Her financial advisor recommended that she consider doing Roth IRA conversions. This strategy minimizes her tax liability and enables her to take distributions over the next 10 years.

Case Study 2: The Benefits of Pre-Death Planning

John’s parents didn’t want to saddle their children with tax increases. In their years of lower income, they were intentionally rolling out a staggered Roth IRA conversion strategy. So they slowly converted several hundred thousand dollars in their old IRA to their new Roth IRA year by year. This strategy not only allowed them to dodge a $1 million+ immediate tax hit, but provided their children with a long inheritance of retirement savings — tax-free. John’s proactive estate planning saved him and his siblings substantial adverse tax impact.

Case Study 3: Spousal Election

For example, assume Mary inherited an IRA from her deceased husband. She just turned 68 years old. Her financial adviser had opened new options. She has the option to extend the IRA’s provisions to her own successor. Assuming she decides to do this, she would not need to take any distributions until age 73. Second, she can choose to rollover the IRA into her own IRA. Third, she has the option of treating the IRA as an inherited IRA. If she does, she needs to avoid this consequence by taking distributions from that inherited IRA.

The Role of OverTraders.com

OverTraders.com is committed to providing traders and investors with the knowledge and tools they need to navigate the complexities of modern financial markets. In the context of inherited IRAs, the platform offers:

OverTraders.com provides detailed analysis of the SECURE Act and its implications for inherited IRAs, helping individuals understand the changes and their potential impact.

The platform offers a range of educational resources, including articles, guides, and webinars, that explain the intricacies of inherited IRA rules and strategies for managing them effectively.

OverTraders.com keeps users informed about any further updates or clarifications from the IRS related to inherited IRAs, ensuring they have the latest information to make informed decisions.

Browse the multitude of guides and tools offered on OverTraders.com to further your knowledge on inherited IRA regulations. You can craft sound long-term strategies that can help you maximize your financial results.

Conclusion

With big changes, especially the soon-arriving 2025 RMD changes, inherited IRA rules can be complicated for them but loaded with opportunities. By understanding the intricacies of the SECURE Act, engaging in proactive planning, and seeking professional advice, individuals can navigate the new landscape effectively and minimize potential tax liabilities. Get the knowledge you need to protect your money and achieve your dream retirement. Iterate your approach in order to drive the best outcomes possible.