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Carla Fried: What to know before you leave your IRA or 401(k) to the kids

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Published in Home and Consumer News

Their tax bill is accelerated under new law

By Carla Fried financial news editor

Of the many changes wrought by the SECURE Act of 2019, one of the most significant governs how those who inherit retirement accounts take distributions. Starting in 2020, new non-spouse beneficiaries have just 10 years to empty the account. Under old tax law, such beneficiaries were able to “stretch” their withdrawals out over their entire life, as long as they made annual required minimum distributions (RMDs) based on an IRS formula tied to their life expectancy.

The new law does not change the rules for how spousal inheritances are handled. Spouses still have a variety of stretch options. Other exceptions include disabled or chronically ill beneficiaries, those within 10 years of the age of the deceased and minor children of the deceased but only until they hit 18.

For example, under the old system, the first RMD for a 40-year-old, non-spouse (such as a child, grandchild, sibling or nice neighbor next door) who inherited $100,000 would have been $2,294. The formula would increase the withdrawal rate slightly each subsequent year, but RMDs could continue for the rest of the beneficiary’s life. To be clear, anyone who inherits a retirement account can empty it all into one big withdrawal, but the law only required small annual withdrawals to keep the IRS happy.


Under the new rule, a $100,000 IRA or 401(k) inherited by someone other than a spouse must be drained within 10 years after the year the owner dies. No stretching allowed.

If the money is in a traditional retirement account, every dollar withdrawn is counted as taxable income in the year of the withdrawal.

10-year rule, but no RMDs

While the new law imposes a 10-year withdrawal timeframe, there aren’t any annual RMDs. All that matters is that by the end of the 10-year window, the account is empty. Fail to do that, and the IRS will assess a penalty equal to 50% of what remains.


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