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Q: My dad passed away last month. He had Inherited an IRA from my uncle a couple of years ago and was taking out a minimum each year. I have now inherited that account. Is my minimum the same as his or do I have to take a different amount?
— Paul in Baton Rouge
A.: Paul, my condolences on the loss of your father.
Your dad was subject to Required Minimum Distributions (RMD) based on his life expectancy. He was utilizing the “stretch” provisions in the tax code. The SECURE Act passed in late 2019 eliminated the stretch capability for most nonspousal beneficiaries. Spouses, persons less than 10 years younger than the deceased (siblings typically), disabled persons, and minor children can still utilize a stretch IRA.
Prior to the SECURE Act, the rule was you, the inheritor of an Inherited IRA, would continue to be subject to RMD using the same calculation method as your dad, the original inheritor. Since your uncle passed prior to 2020, your dad was able to stretch the distributions. Because you are now inheriting based on a death that occurred after 2019, you fall under the new rules.
Assuming you do not qualify for stretch treatment, you do not need to make any calculations, under the new rules. Distributions are entirely at your discretion except that the entire account must be emptied by the end of the 10th year after the year of your father’s death (2030). Each year, you may take any amount you like at any time or take no distribution at all.
This flexibility can be a blessing or a curse. In most cases, the IRA will hold only pretax dollars making any distributions you take taxable income to you. This creates the temptation to not take any distributions until you absolutely must.
It is nice to be able to pick and choose when to take funds but if you delay taking any distributions until 2030, all of the current balance plus all earnings will have to come out at once, likely bumping you into a higher tax bracket. It may be better to take distributions before the 10-year deadline to spread out the income and pay less taxes.
The rules are the same for Inherited Roth IRAs but the optimal distribution strategy is different. Most people will be better off leaving funds in an Inherited Roth IRA for the full 10 years. This enables the account to continue to grow without any taxation and the larger sum that accumulates over the decade to be taken out tax-free.
Clearly inherited Roth IRAs are more tax friendly to beneficiaries than traditional IRAs. I mention inherited Roth IRAs only as an aside. You cannot convert an Inherited IRA to a Roth account. Conversions to Roth accounts must occur before the original IRA owner’s death.
An additional thought regarding the Inherited IRA is that if you are charitably inclined, you may wish to use the inherited IRA for funding your contributions if you are old enough. At any point after you turn 70½, you can make direct contributions from the inherited IRA to qualified charities via a Qualified Charitable Distribution with no tax consequences.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.
