How to Pass Down an IRA

What You Need to Know

The Secure Act has created a number of estate planning issues surrounding inherited IRAs.
There are several advantages to naming a spouse as the primary IRA beneficiary.
Roth IRAs and conversions can be a key approach for some clients.

For many clients, an individual retirement account may be the largest, or one of the largest, assets in their estate. Planning for the distribution of this significant asset upon their death is an important part of their estate planning. 

IRAs pass by beneficiary designation. It’s important to review the beneficiary designations on all client IRA accounts, as well as other retirement accounts like 401(k)s, on a periodic basis. The same goes for any life insurance policies. 

Family situations and other relationships change, and people die. Be sure that the client’s IRA is not going to a beneficiary who is deceased or to someone the client no longer wishes to benefit from the account upon death. 

Secure Act and Inherited IRAs

Before passage of the original Setting Every Community Up for Retirement Enhancement (Secure) Act, beneficiaries of inherited IRAs could stretch their distributions over their life expectancy. This, in most cases, reduced their required minimum distributions and the associated tax hit. 

With the changes effective in January 2020, spousal beneficiaries and certain non-spousal beneficiaries can still stretch their inherited IRAs. However, non-designated beneficiaries must now take a full distribution from their inherited IRA within 10 years.

For traditional IRAs, this can lead to a substantial tax liability that significantly reduces the value of the inheritance. 

Spousal Beneficiaries

Married individuals often name their spouse as the primary beneficiary of their IRA. Whether this is the most beneficial option for a couple will depend on their situation.    

As there are generally no estate limits on assets passed between spouses, a surviving spouse has a number of options regarding an inherited IRA. 

One is to treat the inherited IRA as their own. If the IRA is a traditional IRA and the surviving spouse is younger than 73, but their spouse had begun taking their required minimum distributions, treating the inherited IRA as their own allows them to delay future RMDs until they reach age 73. This option allows the IRA to continue to grow tax-deferred until RMDs commence. Note, if the deceased spouse had not taken their RMD for the current year, the surviving spouse will need to take that distribution. 

If the surviving spouse is younger than 59.5, they can treat the IRA as an inherited IRA and stretch RMDs based on their life expectancy. This was the case with all inherited IRAs before the Secure Act, and this option allows the surviving spouse to avoid penalties on these distributions. 

Secure 2.0 has added some RMD flexibility for surviving spouses inheriting their deceased spouse’s IRA.