Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hi, Mike.

Mike: Hey, Maddie. How are you?

Madison: I’m good. How are you?

Mike: Good.

Madison: Great. Today’s conversation covers a topic that’s become a lot more complex, and that’s inherited IRAs.

SECURE Act and SECURE 2.0 Changes

Mike: Right. Especially now that the IRS has started enforcing rules that were introduced a few years back under the SECURE Act and the SECURE Act 2.0. For anyone who’s inherited retirement accounts or plans to leave one to their heirs, 2025 is a key year. And, Maddie, can I just go and say that inherited IRAs used to be this thing that would come up once in a while. You know, you couldn’t always leave an inherited IRA. At one point, whoever got it would just have to cash it out, pay taxes on the whole thing. And then they made it so that you can leave it to your spouse. And then, you know, after that, they made it so you could have, like, a stretch IRA. And so if you told me 25 years ago that we’d have, like, a hundred different Inherit IRAs, that we had, like, four sets of different rules to follow, I would have never believed it. But it has grown and become incredibly complicated. And that’s where we’re at today. That’s the landscape.

Madison: Awesome. So in this episode, we’re breaking down what’s changed, how it affects both beneficiaries and IRA owners, and what thoughtful planning looks like now. Let’s start with context. The original SECURE Act came out in 2019, and SECURE 2.0 followed in 2022. While both were framed as pro-retirement savings legislation, they also reshaped how inherited IRAs are treated.

Mike: Right. So SECURE 1.0, raised the RMD age and removed the age cap on IRA contributions. The RMD age is the age that you have to take money out. And the IRA contributions, you know, there was a limit before, but now you can contribute to an IRA as long as you have earnings from work. SECURE 2.0 added catch-up provisions and support for small businesses. But from a legacy planning standpoint, the most significant change was the elimination of the stretch IRA for most non-spouse beneficiaries.

The 10-Year Rule and RMDs

Madison: That stretch IRA strategy, being able to spread RMDs over your own lifetime, was a core part of many estate plans. Losing that option changed the tax and timing dynamics in a big way.

Mike: Sure, it’s been a huge thing. You know, like, most people that we have as clients don’t need to use all of their IRAs, they just have to take out whatever the required minimum distributions are and then save the rest. And so we’re at a point now where people have pretty big IRAs and we’re thinking that their beneficiaries will be able to stretch out the distributions over their lifetime. And now it’s different. So most non-spouse beneficiaries now have to fully deplete inherited IRAs within 10 years of the original owner’s death. And that’s what we refer to as a 10 year rule. And to add to the confusion, because we never subtract the confusion, we just add to the confusion. Well, that rule went into effect in 2020, IRS didn’t really enforce it. So from 2020 to 2024, there were no penalties if annual withdrawals weren’t taken. But that grace period ended January 1, 2025. That’s why we’re doing this podcast. This year enforcement begins. That means beneficiaries who miss required withdrawals could face tax penalties.

Madison: So now it’s critical to understand exactly how the rules work and how they apply depending on when the original account owner passed away. Let’s break down the two scenarios. If the original account owner died before their RMD start date, typically April 1st of the year after turning 73, annual RMDs aren’t required. But the account still has to be emptied by the end of year 10.

Mike: Right, but if the owner died on or after their RMD start date, the rules are more complex. The beneficiary must take annual RMDs in years one through nine, based on their life expectancy, and then just deplete the rest of the account in year 10.

Madison: That’s a big distinction and an easy one to miss. People may assume they have 10 years with no action required, but that only applies in some cases.

Mike: Right, and that’s how, it was thought it was going to be for a couple years in 2020-2024. But that’s not what it is.

What is an Inherited IRA?

Madison: So it is worth clarifying what an inherited IRA actually is. Whether someone Inherits a traditional IRA, a Roth, or even a 401(k), those assets are typically transferred into an inherited IRA held in the beneficiary’s name. So it would be like, Estate of whatever for benefit of Maddie.

Mike: Right. So even if someone plans to withdraw everything immediately, it still needs to be processed through an inherited IRA structure first.

Madison: And that has to happen within 60 days of inheritance, regardless of whether the beneficiary intends to take a lump-sum distribution.

Beneficiary Categories

Madison: All right, now let’s talk about who’s impacted. There are two key categories of beneficiaries: Eligible Designated Beneficiaries and Non-Eligible Designated Beneficiaries.

Mike: Right. Eligible Beneficiaries, often referred to as EDBs, not to be confused with EDM. These are EDBs, can still stretch distributions over their lifetimes. This includes surviving spouses, minor children of the account owner, individuals with disabilities or chronic illness, and beneficiaries less than 10 years younger than the decedent. Then we have Non-Eligible Designated Beneficiaries, adult children, grandchildren, more distant relatives, even charities or estates. These folks must follow the 10-year rule, and in many cases, take annual RMD starting now. That’s a key planning issue, especially if someone assumed their kids would be able to let those assets grow tax-deferred for decades. That’s no longer the case.

Tax and Planning Implications

Madison: So why does all this matter beyond compliance?

Mike: Oh, Maddie. In a word, taxes. These forced withdrawals are treated as ordinary income, which could push a beneficiary into a higher tax bracket. And it’s not just federal income taxes. It could impact Medicare premiums or cause Social Security benefits to become taxable. And on the estate planning side, many people built strategies that assumed heirs would stretch those assets. And that’s no longer realistic for most beneficiaries, so estate plans need to be reviewed. You know, like if someone has a large IRA and they have one child and that child is a big earner, which happens a lot. We have a lot of that situation. We have children in their peak earning years having to take six figure required minimum distributions from their parents accounts. That adds a whole lot of taxes to the child that I’m sure the parent was not thinking, at the time, you know, when things were set up. You know, and the way the rule was changed, for a lot of people, it’s hard to make adjustments. Right. If you’re like 85 and you’re taking your just your RMDs and you wind up having a large account, what you can do is actually limit it at that point, you know.

Proactive Planning for IRA Owners

Madison: So if someone owns an IRA today, this is a good time to get proactive.

Mike: Yeah, it really does make a lot of sense, you know. First, review your beneficiaries. Make sure designations reflect your current wishes, and determine whether your heirs are EDBs or not. Second, consider Roth conversions. You know, if your heirs are likely to face big taxable RMDs, it might make sense to convert some funds and pay the tax now. Hard part about that is if you’re already taking your RMDs and you’re on and you know, you’d be taking Social Security because you’d be in your 70s, you already have a pretty good taxable income. And so you might have to think about like what your situation is for your children to see whether that makes sense. And a lot of times for a lot of people, it’s too late. Right. The usual Roth conversions done in your 60s or earlier. You know, another thing is explore charitable strategies or consider naming a trust as the beneficiary, especially if you’re concerned about how the money will be used. But keep in mind, trust introduce complexity and need careful coordination with your estate attorney. And lastly, review your state documents. These rule changes can affect how assets flow under your will or trust, so this is a good time to revisit everything with your advisor and estate planning team.

Action Steps for Beneficiaries

Madison: If someone has inherited an IRA, especially one inherited after 2020, then 2025 is the year to take action.

Mike: Yep. And that means- And what does action mean in this situation? That means figuring out your beneficiary classification, understanding your withdrawal requirements, and getting ahead of the tax implications. Waiting could lead to penalties and missed planning opportunities.

Common Myths About Inherited IRAs

Madison: All right, let’s tackle a few myths that still trip people up. Which ones come to mind?

Mike: Well, there are a few. One is: “I can just withdraw everything in year 10.” The reality is not always, it depends on when the original account owner died. You know, one of the things that is a constant challenge in planning is when the rule is something at a particular date and time, people just think that’s what the rule is always going to be or always was. We still have people confusing the rules for selling your house from the rule that changed in 1998. It’s 27 years later. You know, another misconception is that “spouses can’t stretch IRAs anymore.” You know, spouses still have access to lifetime stretch provisions. And, you know, I also hear “if I haven’t made withdrawals since 2020, I still have time.” No, the IRS waived enforcement through 2024, but those rules are in effect now and penalties apply. You know, another one, “Oh, those changes don’t affect me unless I inherited an IRA.” Well, yeah, but, you know, IRA owners should revisit their legacy strategy in light of these changes.

Madison: Inherited IRA rules have evolved, and 2025 is a turning point. Whether you’re leaving assets or receiving them, the new rules have real tax and planning consequences.

Mike: Yeah, that’s right, Maddie. You know, what used to be a set-it-and-forget it part of your plan now requires real strategy. You know, you need to understand your beneficiary types, and you need to coordinate with your CPA and your attorney, and revisiting your plan can make a huge difference.

Closing Remarks

Madison: If you’re unsure how the new inherited IRA rules apply to your situation, or just want to make sure your strategy is still aligned with your goals, we’re here to help.

Mike: It is never too early to get ahead of changes. If you’d like to review your situation to see if there are any planning or changes needed, just reach out to our office and schedule time for us to meet. That is literally what we’re here for.

Madison: Thanks, Mike. For more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to subscribe to our YouTube channel. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.