Dear Liz: I have an IRA worth over $1 million and am taking required minimum distributions. When my kids inherit this, can they take it all out with no tax issues because it is an inheritance? Or will they have to take required minimum withdrawals when they are old enough?
Answer: Retirement accounts don’t get the favorable step-up in tax basis that other assets typically get when someone dies. Your children will pay income tax on any withdrawals from an inherited IRA and most likely will have to drain the account within 10 years.
In the past, IRA beneficiaries other than a spouse had to start taking required minimum distributions after the account owner’s death. They couldn’t put off required minimum distributions until their 70s, but they could base the distribution amounts on their own life expectancies. The so-called “stretch IRA” let most of the assets continue to grow tax deferred.
But the stretch IRA was eliminated for most beneficiaries by the SECURE Act, which Congress passed in December 2019. The reasoning was that retirement accounts were meant to support the original account owner in retirement, not to provide tax-deferred benefits to their heirs. There are certain exceptions for beneficiaries who are surviving spouses, minors, disabled, chronically ill, or within 10 years of the age of the original account holder.