The 2019 Secure Act changed rules governing distributions from inherited IRAs and 401(k) plans. The new rules prevent some beneficiaries from stretching withdrawals across their lifetime. This CNBC article does a good job explaining the rules.
The new rules require many people who inherit a 401(k) plan to take disbursements within a 10-year period. However, there are some exceptions for minors and spouses.
The clock for disbursements over a 10-year period starts at 18 for minors inheriting a Roth IRA. However, prior to becoming 18 the minor must make a required minimum distribution RMD based on life expectancy. The RMD for minors should be really small because minors have a large future expected life. This rule might make sense if the IRA or 401(k) is huge but is it rational for people who inherited a small account?
The distributions from Roth accounts are tax free while the distributions from conventional accounts are taxed as ordinary income. I guess the Treasury will gain some tax revenue from accelerated Roth distributions if the funds are invested in assets with taxable interest, dividends or capital gains.
The distributions over the 10-year window can occur in any year. Since Roth accounts are not taxed it may make sense to distribute the funds in year 10. Conventional accounts are taxed; hence, taxpayers may want to spread distributions across years.
Funds not distributed by year 10 are subject to a 50% tax. Ouch!
Spouses who inherit an IRA do not have to take distributions until age 72.
The time frame for distributions for people who inherit an account through probate is 5 years not 10. Hence, it is important to name a beneficiary on your 401(k) or IRA.
Many people who inherit IRAs or 401(k) plans have modest income. This bill requires distributions even when the person might be better off saving for retirement. Many people inheriting a small IRA or 401(k) are not wealthy.
The bill was passed during the Trump Administration. Trump Administration and Republican tax policy was in general very generous to high-income people but not averse to using complicated rules to get a bit more tax from some people who may be middle income.