Page 20 - BusinessWest June 13, 2022

Inheriting an IRA
The Rules Have Changed, and Some of the Penalties Are Harsh
By Barbara Tromblay, CPA
Over the past few decades, investing in retirement plans has become non- negotiable. Social security isn’t enough
to support us in retirement.
If you received a tax deduction when you con-
tributed to your plan, any distribution will be fully taxable to you when you take it. But what happens when you inherit someone else’s plan? Or if you die and leave your plan to your spouse or children?
The Secure Act (Setting Every Community
Up For Retirement Enhancement) passed in 2019, and it changed many of the rules for inher- ited retirement accounts. For simplicity, we will discuss Roth IRAs and Traditional IRAs in this article.
The rules for a spousal inheritance of a Roth IRA haven’t changed with the Secure Act. A spouse can assume the Roth as their own and follow regular Roth IRA rules. The rules are dif- ferent when the beneficiary is not a spouse. Pre- Secure Act, a non-spouse could open an Inher- ited Roth IRA and take distributions over their lifetime.
But after the passage of the SECURE Act, this provision was eliminated. Roth IRA beneficiaries are now required to withdraw all funds within 10 years of the original account holder’s death. Only
an inheriting spouse can stretch the Roth IRA distributions out for a lifetime. Any other benefi- ciary, such as a child, must close out the account within a decade. A tax loophole has been closed. No longer can you experience compounding growth with tax deferral over
your lifetime.
With Traditional IRAs,
spousal inheritances are and
have always been simple. A
spouse can assume the IRA as
their own and take distribu-
tions based on their own life
expectancy. In most cases this
would be the desirable choice
(for tax purposes) as it allows
the spouse to take out and pay
taxes on only what is required by law (as set by the IRS RMD tables).
What if you inherit an IRA from a non-spouse? Many people have aging parents that have not depleted their IRAs. Pre-2019, the rules were sim- ple. If you inherited an IRA, you could set up an Inherited IRA account, and take out minimum distributions based upon your age. For instance, if you were 50 years old and inherited a $500,000 IRA, your first-year distribution, using the IRS Single Life Expectancy table would be less than $15,000.
The bulk of the account could grow tax- deferred while you would make slightly larger withdrawals as the years passed. This made for a popular estate-planning strategy where grand- parents could leave their retirement accounts to
“The Secure Act (Setting Every Com- munity Up For Retirement Enhance- ment) passed in 2019, and it changed many of the rules for inherited retire- ment accounts.”
their young grandchildren who would only need to take out small distributions on a yearly basis. The Secure Act changed this rule.
Currently, a non-spouse that inherited
an account after Jan. 1, 2020, has 10 years to
empty out the account. The non-spouse can
take out some each year to minimize taxes or
the whole amount in year 10. Exceptions are
made for disabled or chronically ill individuals,
those whose age is
within 10 years of
the deceased, and Continued on page 45
IRA
You Worked Hard to Save for Retirement.
Now What?
Barbara Trombley, Financial Advisor, CPA
Mike Trombley, Financial Advisor, Former MLB Player
Since 1965
Call or visit our website
for more information:
(413) 596-6992 www.TrombleyAssociates.com
3 Retirement and Estate Planning 3 Investments
3 Social Security Review
3 Tax Strategies
Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial.
20 JUNE 13, 2022
BANKING & FINANCIAL SERVICES BusinessWest