At Casey Lundregan Burns, P.C., we have served Massachusetts families for more than 90 years, and our firm provides steady guidance to help you manage retirement accounts with care and confidence.
This guide walks through current distribution rules, the tax issues that catch people off guard, and the choices each beneficiary type can make. Our goal is simple: to help you keep more of what was left to you and protect your family’s long-term interests.
How the SECURE Act and SECURE 2.0 Affect Your Inheritance
The SECURE Act and SECURE 2.0 set new timelines and withdrawal patterns that affect nearly every beneficiary in Massachusetts. Getting the framework right helps you avoid penalties and unexpected tax bills.
The Elimination of the Stretch IRA
Before 2020, many non-spouse beneficiaries could take withdrawals over their lifetimes, often referred to as “the stretch approach.” The SECURE Act largely removed that option for non-spouse beneficiaries, thereby shortening the window for tax-deferred growth. Some beneficiaries still qualify for lifetime payouts, but they are in special categories explained below.
For families who planned for long-term stretches, this felt like a big shift. The timing of cash flow now matters much more. Planning can turn this change from a headache into a reasonable schedule.
The 10-Year Distribution Mandate
Most non-spouse beneficiaries must empty the inherited IRA by December 31 of the tenth year after the original owner’s death. There is no single required pattern inside that window, which gives you the flexibility to spread income over better tax years. Many people set a basic yearly target to avoid a big year-10 crunch.
Setting a cash-flow script early keeps life simpler. Your tax return will thank you later. A good plan also helps manage investment risk while the account spends down.
IRS RMD Regulations for Inherited Accounts
If the original owner had already started Required Minimum Distributions, current IRS guidance says the beneficiary must take annual distributions in years one through nine, then finish the account by the end of year ten. That means two things at once: yearly RMDs plus the full clean-out deadline. The IRS has offered penalty relief in recent years, but beneficiaries should still plan for annual pulls going forward.
The required beginning date generally ties to federal RMD age, which is 73 under SECURE 2.0 for many people. When in doubt, ask the custodian for the decedent’s last RMD status and balance on the date of death.
Here is a quick list of smart first steps after inheriting an IRA. These moves prevent rushed decisions and help keep taxes manageable.
- Call the custodian and request a date-of-death balance and a beneficiary distribution kit.
- Avoid taking a lump sum before you understand the tax hit and deadlines.
- Set calendar reminders for the 10-year deadline and any annual RMDs that apply.
Once those basics are in place, you can decide which path fits your role as a spouse or non-spouse beneficiary.
Distribution Options for a Surviving Spouse
Spouses get the widest range of choices. Your age, income needs, and IRA type make a big difference. Here are the three most common paths.
Executing a Spousal Rollover
A spouse can roll inherited funds into their own IRA, then use their own RMD timetable. This often delays required withdrawals until you reach age 73, which helps if you want tax-deferred growth and do not need the money right now. Many spouses prefer the simplicity of a single account under their own name.
If the original IRA was a Roth, a rollover into your own Roth can preserve tax-free growth. Check the five-year clock on Roth rules before making a big move. The custodian can confirm the original account’s open date.
Setting Up an Inherited IRA
If you are younger than 59½ and need access, an inherited IRA in the decedent’s name for your benefit can allow withdrawals without the 10 percent early withdrawal penalty. You might still owe income tax on Traditional IRA pulls, but the penalty would not apply. This path can help bridge living expenses without painful add-on costs.
Make sure the account title reflects beneficiary status and the decedent’s name. A transfer done the wrong way can cause a taxable event. Work with the custodian on a trustee-to-trustee transfer to maintain the tax shelter.
Converting to a Roth IRA
Some spouses choose to convert Traditional IRA assets to a Roth, often in lower-income years. The conversion triggers income tax today, then future qualified withdrawals can be tax-free. This can pair well with a gap period before Social Security or pension income starts.
Spouses often ask which choice is best. There is no one-size answer, but tax brackets, age, and cash needs usually point in an easy-to-understand direction. We can model a few timelines to see what fits your goals.
Given the complexity of the subject, our firm can help you choose the right path. For instance, we will help you with the following activities:
- Confirm your age, the decedent’s age, and whether required minimum distributions, or RMDs, had begun.
- Estimate your income for the next two to three years to spot low-tax windows.
- Pick the account type that fits your cash needs and risk comfort, then schedule withdrawals.
With that foundation, non-spouse beneficiaries can look at a different set of rules.
Guidelines for Non-Spouse Beneficiaries
Non-spouse beneficiaries are usually subject to the 10-year deadline. The path you choose starts with setting up the right type of account and checking whether you fall into an exception group.
Managing an Account as a Standard Non-Spouse Beneficiary
Our firm can help you manage an IRA as a standard non-spouse beneficiary. We will support you by guiding you through the process. First, you will open a separate inherited IRA in your name, with the decedent and your beneficiary listed as the title. Next, we will request a trustee-to-trustee transfer from the original account to avoid accidental taxation. Once set, you can plan withdrawals over the 10-year window, or follow both annual RMDs and the 10-year rule if the decedent died after their required beginning date.
Custodians often have slightly different forms and timelines. Give yourself a few weeks to get the paperwork squared away. Filing early in the year helps you spread income across more months.
Not everyone is locked into the 10-year-only approach. A short list of exceptions allows lifetime payouts or slower schedules. Working with an attorney will simplify an otherwise sometimes confusing process.
Exceptions for Eligible Designated Beneficiaries
The groups that qualify for more flexible rules include: minor children of the decedent until age 21, people who are disabled, people with chronic illness, and beneficiaries who are not more than 10 years younger than the decedent. A surviving spouse also qualifies, covered in the section above. Once a minor turns 21, the 10-year clock usually starts.
The custodian may require proof of status. Keep medical documentation handy if disability or chronic illness applies. Ask the custodian what they need in writing.
Inheriting Through an Estate or Trust
If the IRA passes to the estate, and the owner died before their required beginning date, a 5-year clean-out rule can apply. Trusts can be more technical, and some trusts qualify for look-through status that affects timing. When a trust is named, a short review of the trust language pays off.
Trustees should keep detailed records of each distribution. Beneficiaries often need those figures for both federal and Massachusetts returns. Good records help prevent mismatches on tax forms.
Tax Consequences and Costly Errors to Avoid
Taxes can erase dollars fast if withdrawals are rushed or paperwork is off by a hair. Your inherited IRA is a powerful asset, but it needs a careful hand. Here are the risks we see again and again.
The Danger of Immediate Lump-Sum Withdrawals
Cashing out a Traditional IRA in one shot often spikes taxable income and can push you into a higher bracket for that year. It can also inflate Medicare premiums and phase out income-related benefits. Spreading withdrawals across several years can control the tax bite while still giving you access to funds.
Roth IRAs usually avoid income tax on qualified distributions. Timing and the five-year clock still matter. Double-check both before taking a large amount.
Severe Penalties for Missed RMDs
If an annual RMD applies and you skip it, the IRS can assess an excise tax of up to 25 percent of the amount you failed to withdraw. If you correct the shortfall quickly, that penalty can drop to 10 percent. Filing Form 5329 and attaching a short statement often helps set the record straight.
Set alerts on your phone and calendar. If you use more than one custodian, track each account separately. A missed RMD from a single inherited IRA can still create a penalty.
Traditional vs. Roth IRA Tax Rules
Traditional IRA distributions are taxed as ordinary income, while inherited Roth IRAs are usually tax-free if the original Roth IRA has been open for at least 5 years. Timing still matters for the 10-year or lifetime rules. The table below compares common situations at a glance.
Choosing to Disclaim the Inheritance
Disclaiming lets the IRA pass to the next beneficiary in line, which can help with family goals or tax planning across generations. Federal rules require a written, irrevocable disclaimer within nine months of death, and you cannot accept any benefits before disclaiming. In Massachusetts, the disclaimer must often be delivered to the custodian and, when relevant, filed with the Probate and Family Court.
Disclaimers can be powerful tools for shifting assets to a child with college costs or to a younger heir in a lower tax bracket. Timing is strict, so act early if this path might make sense. We can review the form and coordinate filing details.
Get Direct Guidance Before Making Changes to an Inherited IRA
An inherited IRA can create important tax and distribution issues, and one wrong move may be difficult to undo. Casey Lundregan Burns, P.C. has guided Massachusetts families through inheritance, trust, and estate matters for three generations. We help beneficiaries, trustees, and personal representatives understand their options and make informed decisions that protect long-term value.
Phone 978-741-3888 or complete our Contact Us page before taking action. We welcome your questions and can coordinate with your financial advisor or tax preparer to help you move forward with confidence.
DISCLAIMER: “The information provided in this blog post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.”