Inherited Retirement Account Withdrawal Rules

What do you need to take out and when?

The rules have changed regarding when a beneficiary must take money out of their inherited retirement plan or IRA account, referred to here as an “Inherited Account”.  The SECURE Act of 2019 and the SECURE 2.0 Act of 2022 set up new rules for Inherited Accounts, including whether beneficiaries must take money out of those accounts on an annual basis.

It is important to understand these new rules so you may make the best choices for you and your family and avoid significant IRS penalties that could reduce your inheritance.

When must a surviving spouse take money out of their Inherited Account?

Generally, the surviving spouse of the original retirement account owner (“Owner”) may withdraw the balance of their Inherited Account over the course of their lifetime.

Other beneficiaries who may withdraw their Inherited Account over their lifetime include: (a) disabled and chronically ill persons, (b) minor children of the Owner (until they turn 21 years old), and (c) persons not more than ten years younger than the Owner.   Each of these beneficiaries are known as an Eligible Designated Beneficiary (“EDB”).

What if you are not an EDB?

In general, a Non-Eligible Designated Beneficiary (“NEDB”) must withdraw the entire balance of the Inherited Account within ten years after the Owner’s death.

Do those beneficiaries need to make annual withdrawals?

If the Owner was required to take annual distributions out of their account prior to their death (known as required minimum distributions or “RMDs”), then the NEDB must take out their own annual RMDs based on their life expectancy.  This requirement is in addition to the requirement that the Inherited Account be fully distributed within ten years.  Based on the size of the account and the RMDs required, the Inherited Account may end up being fully distributed in less than ten years.

What if the Owner was not required to take RMDs?

If the Owner was not required to take RMDs at the time of their death, then the NEDB is not required to take their own RMDs annually after the Owner dies.  They do, however, still need to withdraw all of the funds out of the Inherited Account within ten years of the Owner’s death.  This can be very beneficial in terms of deferring and lowering taxes, because the NEDB can wait to withdraw the funds until year nine or year ten, perhaps after they retire, when they are potentially in a lower tax bracket.

 Are Roth retirement plans and IRA accounts treated the same?

 No, NEDBs who inherit Roth retirement plans or IRA accounts are not required to take annual RMDs.  The NEDB of a Roth retirement plan or IRA account is free to decide when to withdraw funds from the account, as long as the entire account is distributed within ten (10) years of the original participant/owner’s death.  Spouses and other EDBs do not have to withdraw funds from Roth retirement plans or IRA accounts within ten years of the original participant/owner’s death.  They are free to withdraw the funds whenever they wish during their lifetimes.  Roth distributions are tax free, whether you are an EDB or a NEDB.

The rules regarding Inherited Accounts are complex and making sure you make the right choices for you and your family can be daunting.  In order to assure you minimize taxes and make the best decisions, it is advisable to consult an experienced estate planning professional or tax advisor.

Anna R. Myers Norton is an associate attorney with O’Connell and Aronowitz, 1 Court Street, Saratoga Springs, New York.  Anna’s practice is focused in the areas of trusts and estates law, including estate planning and estate administration.