Questions on Inherited IRAs

Many farmers will inherit an IRA from a spouse or relative during their lifetime.  The Secure Act made several changes to when funds from these inherited IRAs have to be distributed.  

A spouse is allowed (in most cases) to distribute the funds over the remainder of her lifetime.  Other certain designated beneficiaries are allowed the same method.  These include minor children (but only until they reach the age of majority), certain disabled individuals and chronically ill individuals  and anyone who is less than 10 years younger than the deceased IRA holder.

Under the old rules, most everyone else could “STRETCH” their distributions over their lifetime.  This could allow a 25 year-old to stretch distributions over 60 years or longer.  However, the Secure Act mandates that these beneficiaries must distribute all funds within 10 years.

Almost all commentators assumed that this allowed these beneficiaries to not make any distributions until the end of the 10 year period.  This would allow earnings to grow tax-deferred.  However, in many cases it might be more prudent to take some distributions each year to keep taxation of the distribution in a lower tax bracket.

However, the IRS just released Publication 590-B and in an example on page 12 of the publication, the IRS indicates that the beneficiary must continue to take a distribution each year and whatever is left in year 10 must be fully distributed.  There is a five-year rule that requires no annual distribution but all remaining assets must be distributed by the end of year 5.  Everyone thought the IRS would use the same logic for the 10-year rule as the 5-year rule, but this example contradicts that conclusion.

If you inherited an IRA in 2020, there was no requirement for a distribution that year due to the CARES Act.  Based on Publication 590-B, you may be required to take one this year.  However, the IRS has not yet formally provided guidance on this subject and final guidance may indicate you do not need to take a distribution.  You should check with your tax advisor before year-end to see if you are required to take a distribution.