Inheritances

The assets held in the decedent’s retirement plan accounts – i.e, IRAs, 401(k) and 403(b) Plans, Pensions, etc. are generally not taxable income to the heirs per se.

Instead, the Executor of the decedent’s Estate must ask each fiduciary - i.e., the bank, brokerage or mutual fund firm that held these retirement plan assets on account on behalf of the decedent - to transfer such assets into new rollover IRA accounts for each heir according to the terms of the Last Will and Testament of the decedent.

Prior to 2020, Inherited Plan recipients had to start taking withdrawals from their Inherited Plans in the year immediately after the decedent’s death.  The amount of the withdrawals, known as Required Minimum Distributions (RMDs) were determined by size of the Inherited Plan’s assets and by the IRS’ actuarial life expectancy tables that extend all the way out to age 115.

Under the "Setting Every Community Up for Retirement Enhancement Act of 2019,” also known as the “SECURE Act”, individuals who inherit an IRA after December 31, 2019, are required to withdraw all IRA plan assets within 10 years of the original account holder’s death.  There are no RMDs during the 10-year period, as long as the entire IRA balance is withdrawn within 10 years of the date of the decedent’s death.  §401 of the SECURE Act essentially eliminated “stretch” IRAs that could be stretched over the life of the beneficiary and grow tax-deferred for an extended period.  §401 of the SECURE Act does not apply to account holders who died prior to December 31, 2019, and in this scenario, a beneficiary may still “stretch” distributions over his or her own lifetime. It is important to review client estate plans as the 10-year payout rule will come as a surprise to many and could undermine the original intent of the estate plan.