Smart Tax Planning

Inherited an IRA? You can skip your distribution for 2020

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Key Points
  • The new coronavirus relief law permits savers to skip mandatory withdrawals from their IRA or 401(k) for this year.
  • This new waiver also applies to beneficiaries who have inherited retirement accounts.
  • Inherited a Roth IRA? You get the benefit of another year of tax-free accrual with no required distributions.
US President Donald Trump participates in a meeting with Supply Chain Distributors to discuss the response to COVID-19 at the White House in Washington, DC, on March 29, 2020.
Jim Watson | AFP | Getty Images

This year, heirs of retirement accounts can bypass mandatory withdrawals from those IRAs.

The coronavirus relief bill, which President Donald Trump signed into law on Friday, includes a measure that waives the 2020 required minimum distribution or RMDs from individual retirement accounts and 401(k) plans.

Generally, savers who turn 70½ must take annual withdrawals from these accounts and pay taxes on them. The Secure Act, which went into effect earlier this year, raised the RMD start age to 72.

The RMD relief from the $2 trillion coronavirus bill also extends to children, grandchildren and trusts inheriting retirement accounts.

"Inheritors get the one year off, a waiver of RMDs," said Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York. "Any beneficiary who doesn't want to take the distribution doesn't have to."

Inheritance rules

US Speaker of the House Nancy Pelosi signs the bill after the House passed a $2 trillion stimulus bill, on March 27, 2020, at the US Capitol in Washington, DC.
Alex Edelman | AFP | Getty Images

Individuals who inherited an IRA prior to 2020 must take RMDs based on their own life expectancies. This is a bonanza for young heirs who can take small distributions over their lifetime and "stretch" the tax deferral of the retirement account for decades.

The Secure Act effectively scrapped the "stretch" and instead requires heirs to draw down the inherited account in 10 years if they inherit in 2020 or later.

"The reality is that many beneficiaries take the money," said Slott. "But now they can take a holiday for a year."

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Beneficiaries who really need the cash and are in low tax brackets might consider taking their annual withdrawal anyway.

"They benefit from being in a lower tax bracket, especially if their income takes a hit this year," Slott said.

Roth IRA heirs are also required to take RMDs from the accounts. In this case, it pays to skip a year.

"I'd be more careful with Roth IRA beneficiaries," said Slott. "You'd want to hold the tax-free account as long as possible because it's accruing tax-free."

Five-year distributions

Certain IRA beneficiaries must distribute the entirety of the account within five years of the owner's death.

These beneficiaries, provided they inherited in 2015 or later, are also able to skip this year's RMD and they get one more year to draw down the account, said Slott.

"If you inherited in 2015, by the end of 2020, anything that's remaining in the account must come out," he said. "This year, it's disregarded and becomes a six-year rule."

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