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Inherited IRAs

January 02, 2024
The SECURE Act 2.0 has brought about significant changes in the rules governing inherited IRAs. As a beneficiary, it's important to understand these changes and take the necessary steps to ensure that your inherited IRA is managed in a tax-efficient manner.
One of the most significant changes introduced by the SECURE Act 2.0 is the requirement for beneficiaries to take distributions over a 10-year period. This means that beneficiaries will no longer be able to stretch out their payments over their lifetime, as was possible under the old rules. However, there are some exceptions to this rule.
Spouses who inherit an IRA are still able to treat the account as their own, which means they can continue to defer distributions until they reach age 72. This can be a significant advantage for those who are younger than their spouse and have a longer life expectancy. Disabled or chronically ill beneficiaries are also exempt from the 10-year rule and can continue to take distributions over their lifetime.
Additionally, beneficiaries who are less than 10 years younger than the account holder are also exempt from the 10-year rule. This means that if you inherit an IRA from a parent who is only a few years older than you, you may still be able to stretch out your distributions over your lifetime.
To take advantage of these exceptions, it's important to update beneficiary designations as soon as possible. This will ensure that the account is distributed according to the new rules and that any exceptions are taken into account. If you don't update your beneficiary designation, the account may be distributed according to the old rules, which could result in a significant tax bill.
Working with a financial advisor or tax professional can also be helpful in ensuring that your inherited IRA is managed in a tax-efficient manner. They can help you understand the new rules and develop a distribution strategy that takes into account your unique circumstances.
For example, if you are a disabled beneficiary, your advisor may recommend taking distributions over your lifetime to maximize the tax benefits. If you are a spouse who inherits an IRA, your advisor may recommend rolling the account into your own IRA to take advantage of the deferral rules.
Ultimately, the key to managing an inherited IRA under the new rules is to be proactive and work with a qualified professional. With the right guidance, you can ensure that your inherited IRA is managed in a way that minimizes taxes and maximizes your financial security.