Recently signed into law, the SECURE Act became effective January 1, 2020, and affects the rights of some people who inherit IRA accounts.
Specifically, it applies when an account holder leaves his or her IRA to someone other than a spouse (a friend, child, or other relatives, whom a lawyer would call a “non-spouse beneficiary”). The law changes the time available for non-spouse beneficiaries to withdraw funds from their inherited IRA accounts. Non-Spouse Beneficiaries can no longer stretch withdrawals over the entirety of their lifetimes: they must withdraw all inherited IRA funds within 10 years, (the “10-year rule”). The 10-year rule has three exceptions:
Disabled or Chronically Ill Beneficiary
If a beneficiary is a “Disabled or Chronically Ill Person” as defined by IRS regulations, he or she can slowly withdraw inherited IRA funds over the course of a lifetime. For example, a diagnosed schizophrenic receiving Social Security disability payments would likely fit within this exception. If such a person inherited an IRA from a parent, the IRS would probably exempt him or her from the 10-year-rule.
Beneficiary Close in Age to the IRA Owner
If a non-spouse beneficiary inherits an IRA from someone fewer than 10 years older, he or she can withdraw the funds over the course of a lifetime. For example, a 55-year-old man who inherited an IRA from his 62-year-old sister would fit within this exception and could withdraw the funds over the course of his lifetime. But, that same 55-year-old man would have to withdraw the funds in ten years if his sister was 66.
Eligible Minor Child Beneficiary
If a minor child (typically under the age of 18) inherits an IRA, he or she can withdraw at a rate set forth in IRS life expectancy charts until reaching the age of majority. After becoming an adult, the beneficiary must withdraw the remaining funds within 10 years. For example, an eight-year-old who inherited an IRA from a parent could withdraw the funds at a delayed rate without exhausting the account during his or her childhood. But upon reaching the age of 18, the beneficiary would have 10 years in which to withdraw any money remaining in the IRA.