Inheriting an IRA? Here’s What You Need to Know

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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about inheriting someone else’s retirement account; specifically, the tax implications of inheriting an IRA.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “7 Steps to Make the Most of an Inheritance” and “Big Changes Coming to Retirement Accounts Under New Law” You can also go to the search at the top of this page, put in the words “IRA” or “inherit” and find plenty of information on just about everything relating to this topic.

And if you need anything from tips on finding the best savings account to finding the best financial advice, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Gary:

“What happens to my parents’ IRA after they pass if I was to inherit it?”

Glad you asked that question, Gary, because the rules for inherited retirement accounts recently changed, along with other rules around retirement accounts.

The Secure Act

The Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the Secure Act, was signed into law in December 2019 and took effect in 2020. It changed a few key rules when it comes to retirement accounts.

Let’s go over some of the key changes.

  • No more age limit. The maximum age for contributing to an IRA was 70½. Thanks to the Secure Act, now there’s no age limit. As long as you have income from working, you can contribute.
  • Required minimum distributions: You used to have to start taking money out of your retirement accounts no later than the year you turned 70½. Now those required minimum distributions (RMDs) don’t start until the year you reach 72.
  • Requires employers to let long-term, part-time employees participate in employer-sponsored retirement plans. This change generally will apply to plan years that start after Dec. 31, 2020.
  • Allows small businesses to join together to offer retirement plans.

These changes potentially benefit millions of workers struggling to save for retirement — and millions more who want to give their money more time to grow before they are forced to withdraw it from accounts.

Inherited IRAs

Now, let’s get to Gary’s question and talk about how the Secure Act changed the rules for inherited IRAs.

Before the Secure Act, those who inherited retirement money from accounts like IRAs could stretch withdrawals — and the taxes due on the withdrawals — over their lifetime.

The Secure Act ended this so-called “stretch IRA” strategy.

Now, when you inherit an IRA or other retirement plan, you have to take all the money out, and pay taxes on it, within 10 years.

There are, however, some exceptions. The 10-year distribution requirement doesn’t apply if you’re a surviving spouse, disabled, chronically ill, a minor child or someone less than 10 years younger than the original IRA owner.

Bottom line, Gary? If you inherit an IRA from your parents, you’ll be withdrawing all of that money, and paying taxes on it, over no more than a 10-year period.

Got a question of your own? Do what Gary did: Simply hit “reply” to the daily Money Talks email and fire away. Not getting our newsletter? Fix that right now by going to Money Talks News and subscribing. It’s free, takes five seconds and will absolutely, positively make you richer.

I’m Stacy Johnson. See you here next time!

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About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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