AN INHERITANCE WITH STRINGS ATTACHED

New rules for inherited IRAs could leave some heirs with a hefty tax bill.

- SANDRA BLOCK

In the first quarter of 2023, Americans held more than $12 trillion in IRAs. If your parents saved diligently throughout their lives, there's a good chance you'll inherit some of that money.

But before you quit your day job—or buy a Maserati—make sure you factor in the amount of your inheritance you’ll have to share with Uncle Sam. Thanks to recent changes in the law, along with a new interpretation of those changes from the IRS, your tax bill could be larger than you expect.

Beneficiaries of traditional IRAs have always had to pay taxes on inherited accounts, but before 2020, you could minimize the tax bill by extending withdrawals over your life expectancy. If you inherited an IRA before 2020, you can still take advantage of that strategy to stretch out withdrawals—and taxes—over your life expectancy. Spouses also have that option, among others; the choices are outlined on page 57.

But the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in 2019, put an end to this taxsaving strategy for most adult children, grandchildren and other non-spouse heirs who inherit a traditional IRA on or after January 1, 2020.

Those heirs now have two options: Take a lump sum and pay taxes on the entire amount, or transfer the money to an inherited IRA that must be depleted within 10 years after the death of the original owner. (The clock starts the year after the original owner dies, and the time runs out on December 31 of the 10th year following the year of the owner’s death, so you actually have a little more than a decade to empty the account. For example, if you inherited an IRA in 2020, year one is 2021 and the account needs to cleaned out by December 31, 2030.)