Suze Orman's 8 Essential Tips for Inheriting an IRA Under the New Rules

You'll want to read up if you're inheriting an IRA soon.

Recent changes to the SECURE Act 2.0 have made inheriting IRAs more complex. The Act introduces new rules and tax considerations that can confuse beneficiaries and lead to surprising financial mistakes.

In a recent podcast, financial expert Suze Orman offered clear guidance on inherited IRAs, which can help you maximize financial benefits and minimize tax burdens. Understanding these updates is critical to making informed decisions.

In case you missed her podcast, here are eight crucial things you need to know.

"You need to know that some designated beneficiaries have more privileges than other designated beneficiaries," Orman explained. "Your designated beneficiaries are eligible for more withdrawal privileges than anybody else."

Here are the three categories of beneficiaries, each with different rules:

• Eligible Designated Beneficiary (EDB): Includes spouses, minor children of the deceased, disabled, and chronically ill individuals less than 10 years younger than the deceased plan owner.
• Non-Eligible Designated Beneficiary: Covers most adult children, siblings, and other relatives or friends.
• Non-Designated Beneficiary: Applies to estates, charities, and non-see-through trusts.

Knowing your category determines how quickly you need to withdraw funds and your tax obligations.

The RBD is April 1 of the year after the deceased turns 73. This date determines whether the deceased began taking required minimum distributions (RMDs) from their retirement plan.

Orman wants people to know beneficiaries often have more flexibility if the person passes away before their RBD start date, such as withdrawing the balance within 10 years or stretching distributions over their life expectancy.

If they pass away after their RBD, withdrawals must begin annually, depending on the beneficiary type, based on the beneficiary's life expectancy or the original owner's remaining life expectancy.

"Your surviving spouse has the most privileges of any other beneficiary you can leave your money to," Orman says. "A surviving spouse can take over your retirement account as if it was their own."

This not only offers significant tax advantages, but it also allows them to defer withdrawals until they reach their RBD age or roll the inherited funds into their own retirement account for easier management.

For many, this is an optimal strategy as it minimizes taxes and maximizes growth potential.

The 10-year rule is essential to understand, as it impacts non-eligible designated beneficiaries like adult children. With this rule, you must withdraw all inherited account funds within 10 years.

Spreading out the withdrawals over this period can be a smart move.

As Orman points out, no rule says you must take out equal percentages (i.e., 10%) every year over the 10-year window – only that you have to withdraw all the money by the end of the tenth year. You can time the withdrawals to your advantage.

For example, if your child is a sophomore in college, you might want to wait two years before withdrawing any inherited IRA funds as they would be considered income and lower your child's financial aid package.

Your withdrawal obligations hinge on two critical questions:

1. Are you an eligible designated beneficiary?
2. Did the deceased pass before their RBD?

Answering these questions can clarify whether you must take RMDs annually, within 10 years, or on another schedule. Ensure you know the answer to these two questions to optimize your approach, advises Orman.

Beneficiaries inheriting from someone who passed after their RBD are often required to take annual RMDs and empty the account within 10 years.

Failure to meet both requirements can result in significant tax penalties, warns Orman. Exceptions apply for surviving spouses, minor children, and certain eligible dependents.

If you inherit a 401(k) or other retirement account from your deceased spouse, converting it to an inherited IRA often provides more flexibility.

Inherited IRAs allow for more customized investment choices and withdrawal schedules, helping you manage taxes and grow funds more effectively.

The five-year rule usually applies to estates, charities, and some trusts. If the account owner dies before their RBD, all funds must be withdrawn within five years Orman points out. "Obviously you could do it before then, but by the fifth year after death," Orman explains.

In some cases, distributions can be stretched over the decedent's life expectancy if they passed after their RBD, which could make the withdrawal period much shorter (or longer) than five years. 

"This is actually an advantage if the decedent died on or after their required beginning date, because again, if they had, [they] would not have to take it out over the five years," says Orman.

Inheriting an IRA under SECURE Act 2.0 regulations requires careful planning to avoid unnecessary taxes and penalties. Understanding your beneficiary category, RBD guidelines, and specific rules is critical, Orman reinforces.

Learn ways to align retirement withdrawals with your broader financial goals. Planning ahead helps you ‌maximize your benefits and navigate continually changing rules more confidently so you can use it to enjoy a stress-free retirement.