Understanding Inherited IRA Rules and Regulations
“When a loved one dies, any leftover IRA funds they had, goes to whomever they labeled as beneficiaries. If you're a beneficiary, you have to decide how you're going to use it—a decision that's a little more complicated this year than it normally is.”
Many people are looking at their inherited IRAs this year, when COVID-19 has decimated the economy. The rules about when and how you can tap the money you inherited changed with the passage of the SECURE Act at the end of December 2019. It then they changed again with the passage of the CARES Act in late March in response to the financial impact of the pandemic.
Changes to Inherited IRA Rules Due to SECURE and CARES Acts
Things are different now, reports the article “Read This Before You Touch Your Inherited IRA Funds” from the News & Record, but one thing is the same: you need to know the rules.
First, if the owner had the account for fewer than five years, you may need to pay taxes on traditional IRA distributions and on Roth IRA earnings. This year, the federal government has waived mandatory distributions (required minimum distributions, or RMDs) for 2020. You may take out money if you wish, but you can also leave it in the account for a year.
Spousal Transfer and RMDs for Surviving Spouses
Early Withdrawal Penalty Waived for Taxpayers Under 59½
Five-Year and Ten-Year Methods for Depleting Inherited IRAs
Life Expectancy Method for Specific Beneficiaries
Heirs can take the entire amount in a lump sum immediately, but that may move their income into a higher tax bracket and could increase tax liability dramatically.
A big change to inherited IRAs has to do with the “life expectancy” method, which is now only available to the surviving spouse, minor children, disabled or chronically ill people and anyone not more than ten years younger than the deceased. Minor children may use the life expectancy method until they turn 18, and then they have ten years to withdraw all remaining funds.
Making Informed Decisions on Inherited IRA Distributions
Tax Implications of Inherited IRA Withdrawals
Consulting an Estate Planning Attorney for Personalized Guidance
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