Key SECURE Act Insights On Avoiding 25 Percent Penalties On Inherited IRAs, #275 Retire With Ryan podcast

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Key SECURE Act Insights on Avoiding 25 Percent Penalties on Inherited IRAs, #275

2d ago 14:39

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This episode is essential listening for anyone who’s inherited an IRA, especially in light of the game-changing SECURE Act. If you’ve inherited a retirement account from a non-spouse since 2020, this episode is packed with details you need to know to avoid unexpected tax bills and penalties.

I explain the new rules for inherited IRAs, explaining the requirements and options for non-designated, non-eligible, and eligible designated beneficiaries. Whether you’re figuring out minimum distributions or seeking smart tax-planning strategies, you’ll get clear guidance on how these updates affect you, plus tips to steer clear of common mistakes in 2025 and beyond.

You will want to hear this episode if you are interested in...

[00:00] Inherited IRAs: key details explained.
[02:36] SECURE Act and rule changes.
[04:18] Retirement account beneficiary guidance.
[07:13] IRA inheritance withdrawal rules.
[10:31] IRA distribution rules explained.
[13:36] Get in touch for more inherited IRA guidance & support.

Inherited IRAs After the SECURE Act: What You Need to Know

Before 2020, inherited IRAs were relatively simple: most non-spouse beneficiaries could "stretch" required minimum distributions (RMDs) over their lifetime, potentially lowering annual tax bills. The SECURE Act changed that. If you inherited an IRA from someone who passed away on or after January 1, 2020, new distribution rules likely apply to you, and ignorance could cost you in penalties.

The law categorizes beneficiaries into three groups, and the rules differ based on which kind you are.

1. Non-Designated Beneficiaries

Non-designated beneficiaries are not people; think estates, certain trusts (non-qualifying), or charities. Naming your estate as the beneficiary might not be the best move if you want your family to get the most options. Here’s why:

If the original owner died before their required beginning date (generally April 1 of the year they turned 73), the account must be fully distributed within five years.

If they died after that date, the estate can take distributions using the deceased owner's single life expectancy, but this is still less flexible than for individual beneficiaries.

2. Non-Eligible Designated Beneficiaries

This is the category most adult children, grandchildren, and some trusts fall into. For these individuals, the rules are as follows:

If the owner died before their required beginning date (age 73), you must drain the IRA within ten years, but there’s no mandate on interim distributions until year 10. Be careful, though, a massive, one-year withdrawal could push you into a higher tax bracket.

If the owner died after their required beginning date, Annual RMDs start the year after death using the single life expectancy table, and the account must be completely emptied by the end of the tenth year.

3. Eligible Designated Beneficiaries

This privileged group gets more flexibility, including:

Surviving spouses (who can treat the IRA as their own or as inherited).
Minor children (of the deceased owner, but only until age 21).
Disabled and chronically ill individuals.
Individuals no more than ten years younger than the deceased.

They’re allowed to take stretch distributions based on their own life expectancy, often leading to much smaller annual withdrawals and lower taxes.

Planning Opportunities and Tax Pitfalls

The IRS wants its share, and waiting until year 10 to take out all the funds could mean a significant tax hit. Instead, you might consider spreading withdrawals over several years, especially if you know you’ll retire before year 10, lowering your tax rate in some of those years.

Beneficiaries must also remember critical deadlines. Because the IRS allowed a moratorium on required distributions from 2021 to 2024 due to pandemic-related confusion, many will need to start withdrawing in 2025. Missing a required distribution can cost you 25% of the amount you should have taken, ouch!

Practical Steps for Beneficiaries

Review the decedent’s date of death: This will determine which rules apply.
Identify what type of beneficiary you are.
Plan withdrawals smartly: Don’t let inertia trigger a tax bomb in your tenth year.
Consult a financial advisor: The rules are complex, and the stakes are high; personalized advice can help prevent costly mistakes.
Don’t name your estate or a non-qualifying trust as your beneficiary if you want your heirs to have better options.

Inherited IRAs under the SECURE Act require more attention than ever before. Get proactive: determine your beneficiary type, mark your calendar for required distributions, and develop a tax strategy that fits your situation.

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