Rules Tighten on Stretch IRAs

Washington was busy this holiday season. As many of us were looking forward to some well-earned time off, new legislation was passed, and it affects some of the old rules for traditional Individual Retirement Accounts. These changes went into effect on January 1, 2020.

One of the biggest changes will affect the required minimum distribution (RMD) timeline for IRAs granted to a beneficiary at the time of your death. So, what does this mean for you? Unless an inherited IRA meets a very specific set of circumstances, non-spousal beneficiary is now required to withdraw the money from the IRA within a period of 10 years.

For example, let’s say that you have a hypothetical $1 million IRA. The beneficiary is not required to take a set amount. The requirement is the money must be withdrawn by the end of the 10th year following the year of inheritance. So, if you are leaving your IRA to a 50-year-old child, they must take all the money by the time they reach age 61. In the past, your 50-year-old child could stretch the money over their expected lifetime, or roughly 30 years.

 The new limits on IRAs may force account owners to reconsider inheritance strategies and review how the accelerated income may affect a beneficiary’s tax situation.