Inherited IRA: New Rules You Need to Know for the Series 7 and Series 66 Exams

As of January 1, 2020, significant changes have been implemented regarding the treatment of Inherited IRAs due to the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). These modifications are crucial for financial professionals, particularly those preparing for the Series 7 and Series 66 exams. Candidates should familiarize themselves with these new rules as they may be testable content.

Overview of Inherited IRAs

An Inherited IRA, also known as a beneficiary IRA, is an individual retirement account that is passed on to a beneficiary after the original owner’s death. Such accounts allow beneficiaries to retain the tax advantages of the original IRA, though there are specific rules governing withdrawals and distributions.

Key Changes Introduced by the SECURE Act

1. Elimination of the Stretch IRA

One of the most significant changes is the elimination of the "Stretch IRA" provisions. Before the SECURE Act, beneficiaries could "stretch" required minimum distributions (RMDs) over their lifetime. This meant that younger beneficiaries could extend their distributions over many years, allowing for continued tax-deferred growth.

With the new regulations effective January 1, 2020, most non-spousal beneficiaries must now fully distribute the inherited IRA within 10 years of the account owner’s death. This change accelerates the tax impact on inherited accounts, as beneficiaries must withdraw all funds within this time frame, potentially pushing them into higher income tax brackets.

2. Exceptions to the 10-Year Rule

The SECURE Act does provide exceptions to the 10-year rule. Certain eligible designated beneficiaries can still use the Stretch IRA approach. These include:

• Spouses: Surviving spouses can treat the inherited IRA as their own, allowing them to defer distributions until they reach the age of 72.

• Minor Children: Beneficiaries who are minor children of the deceased can take distributions over their lifetimes until they reach adulthood. However, once they reach the age of majority, the 10-year rule applies.

• Disabled Individuals: Beneficiaries who are disabled may also stretch distributions over their lifetimes.

• Chronically Ill Individuals: Similarly, those deemed chronically ill can withdraw over their lifetimes.

• Individuals Not More than 10 Years Younger than the Decedent: This refers to beneficiaries who are siblings or peers.

3. RMDs and Tax Considerations

After the SECURE Act, while beneficiaries must take distributions within 10 years, the legislation did not specify RMDs for each year during that period. This means that beneficiaries can take as much out as they choose within the 10 years, provided the entire amount is withdrawn by the end of the decade.

Tax planning is crucial for beneficiaries. Large distributions taken in a single year could result in substantial tax liability. Therefore, many financial professionals will advise beneficiaries to plan their withdrawals thoughtfully to avoid unnecessary tax burdens.

Implications for Financial Professionals

Understanding these changes is vital for financial professionals, especially those preparing for their licensing exams, such as the Series 7 and Series 66. Here are some essential points candidates should focus on:

• The fundamental differences between the old Stretch IRA rules and the new 10-year rule imposed by the SECURE Act.
• The list of eligible designated beneficiaries who can still stretch payouts beyond the 10-year limit.
• Strategies for tax-efficient withdrawals to minimize the tax impacts for beneficiaries.

Conclusion

The SECURE Act’s changes to Inherited IRAs significantly reshape how beneficiaries handle inherited retirement accounts. With the emphasis on compliance and strategic tax planning, understanding these rules is crucial for financial advisory professionals preparing for their Series 7 and Series 66 exams. By grasping these new regulations, candidates can not only improve their exam performance but also provide informed guidance to clients navigating these changes.

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