Distribution from Inherited IRA in 2020: Major Changes and What You Need to Know
Introduction to Inherited IRA Distribution Rules
In 2020, the distribution rules from inherited IRAs underwent significant changes due to a new law known as the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). If you have inherited an IRA in 2020, understanding these new rules is crucial to ensure you comply with legal requirements and make the most of the retirement benefits.
New Rules: What You Need to Know
According to the SECURE Act, changes to the distribution rules for inherited IRAs went into effect in 2020. The old rule required the majority of beneficiaries to withdraw the entire IRA balance within ten years. However, the new law allows for a more flexible distribution method. For inherited IRAs, beneficiaries can now use the ten-year distribution rule starting in 2020, if the original IRA owner passed away in or after 2020.
Who is Affected?
The new rules apply to individuals who inherit an IRA in 2020 or beyond. If the original IRA owner passed away before 2020, the old rules still apply, and beneficiaries need to withdraw the entire balance within five years. However, for those inheriting in 2020 and later, the ten-year rule becomes a viable option.
Strategies for Beneficiaries
Given the changes in the rules, it is essential for beneficiaries to consider their options carefully. Here are some key strategies that can help you manage the inherited IRA effectively:
1. Understanding the Ten-Year Rule
The ten-year rule allows beneficiaries to spread the distributions over ten years. This can provide tax advantages, depending on your tax situation. For instance, if you anticipate a lower tax bracket in future years, stretching the distributions over ten years might be more beneficial.
2. Major Eligible Beneficiaries
Eligible beneficiaries, such as surviving spouses, minor children, and disabled beneficiaries, can opt to inherit the IRA and may continue to use existing rules to withdraw funds. Surviving spouses, for example, can often roll the inherited IRA into their own IRA, avoiding the ten-year rule entirely. Minor children can also use the existing ten-year rule, even if the child reaches the age of majority.
Seeking Professional Advice
Given the complexity of these rules, it is advisable to consult with a qualified financial advisor who specializes in IRA management. They can provide personalized advice based on your unique circumstances. You can find such a professional by searching for qualified financial advisors who work with institutions that manage IRAs. Simply type 'SECURE Act new inherited IRA rules for distribution 2020' into your search engine to find relevant resources.
Conclusion
The distribution rules from inherited IRAs have changed significantly in 2020, with the introduction of the ten-year rule for new beneficiaries. Understanding these changes and seeking professional advice can help you make informed decisions and maximize the benefits of your inherited IRA. Stay informed and consult with a financial advisor to navigate the complexities of retirement planning.