If you’ve invested in an IRA for many decades, it may well turn into a key source of income for your retirement. Still, you might not deplete your IRA in your lifetime, especially if you also have a pension or a 401(k) and other investment income. So, if your IRA still has sizable assets after your passing, it would likely end up in your estate plan. If you leave your IRA to grown children or other family members, could they be hit with a big tax bill?
Here’s a little background: Up until the Secure Act of 2019, those who inherited traditional IRAs could extend their required withdrawals over their lifetimes, which stretched out the annual taxes due on these withdrawals. But the Secure Act changed the provisions for non-spouse beneficiaries who inherited an IRA after 2019, meaning that beneficiaries of inherited IRAs had only 10 years (beginning the year after death) to withdraw the entire balance. For some beneficiaries, this could potentially create a tax burden. (Inheritors of Roth IRAs are also required to follow the 10-year distribution rule but are not subject to income taxes on account earnings if the Roth IRA’s five-year holding period has been met).
However, not all beneficiaries were affected by the new rules. Spouses can stretch their inherited IRA distributions over their lifetimes and exceptions exist for certain non-spouse beneficiaries. Minor children of the IRA owner (until the age of majority), chronically ill or disabled individuals, and beneficiaries who are no more than 10 years younger than the IRA owner may opt to stretch their distributions.
