Tax laws surrounding inherited IRAs are complicated. They became more so with the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, and then the SECURE 2.0 Act which passed on December 29, 2022.

The passage of the SECURE Act provides that most non-spouse beneficiaries who inherit IRA assets on or after Jan. 1, 2020, are required to withdraw the full balance of the account within 10 years (the “10-year rule”). This includes adult children and grandchildren and most other designated beneficiaries. This change limits the popular “stretch” IRA tax planning tool, which in the past allowed many inherited IRAs to be distributed over the beneficiary’s lifetime. Now, only select groups, termed “eligible designated beneficiaries,” which include spousal beneficiaries are eligible for more extended deferral periods. Therefore, for most beneficiaries, the 10-year rule is applicable.

Estate planning with IRAs is now based on a case-by-case standard. Some plans implement beneficiary designations in favor of direct individual beneficiaries in lieu of trusts. The analysis of whether to use individuals as beneficiaries versus trusts in terms of estate-planning is highly technical and ought to be considered with great insight.

Ronald Keith Lawn, J.D., LL.M. in Taxation               Stephanie M. LeBlanc, J.D., LL.M. in Taxation