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The Community Foundation Blog


Inherited IRAs: Big headache, or big opportunity?  
By The Community Foundation / October 26, 2022
Inherited IRAs: Big headache, or big opportunity?  

Don’t be surprised to encounter clients in the coming months in a state of confusion over something they have read recently about the IRS’s distribution rules for inherited IRAs.

What’s the Back Story?
Until the law changed a few years ago, a client who was named as the beneficiary of a parent’s IRA could count on a relatively straightforward and tax-savvy method of withdrawals called the "stretch IRA." With the passage of the SECURE Act, that changed for many clients who inherited an IRA after December 31, 2019. Instead of taking distributions over their lifetimes, affected clients would need to withdraw the entire inherited IRA account within a 10-year period as calculated under the law.

What’s the problem now?
The loss of the stretch IRA is unfortunate, but advisors and clients have had time to adjust to the new IRS rules, right? Not necessarily. The IRS rules are, at the moment, unclear. Concern escalated when the IRS issued proposed regulations earlier this year. Advisors and clients are facing a critical discrepancy between what had been understood by practitioners immediately after the SECURE Act was passed and what the IRS has included in the proposed regulations. 

Specifically, some non-spouse beneficiaries of an inherited IRA may not be able to wait until the 10-year post-inheritance mark to fully withdraw the funds in a lump sum, but instead, according to the proposed regulations, must begin taking annual distributions immediately following the inheritance and throughout the statutory 10-year period during which all funds must be withdrawn. This is a hard pill to swallow for clients who were counting on years of additional tax-free growth and who had hoped to defer an income tax hit until a lower-income year. 

The situation is complicated but worth understanding because of the potential headaches the proposed regulation could cause for clients who are caught in the gray area.

A Charitable Giving Opportunity?
T
he current state of confusion could present an opportunity to serve philanthropic clients.

First, when IRAs are discussed, inherited or not, clients should know about Qualified Charitable Distributions (QCDs). As advisors, the topic of QCDs can seem repetitive. Hearing the message multiple times, though, is crucial for clients to truly appreciate the benefits of the QCD.  

As a reminder, through QCDs, a client who is 70½ or older can use a traditional IRA to distribute up to $100,000 ($200,000 for a couple) per year to a qualified charity, such as a designated or field of interest fund, like the Community Impact Fund, at the Community Foundation for a greater Richmond.  This also counts toward satisfying the Required Minimum Distribution (RMD) for clients aged 72 and older.  The distribution is not reported by the client as taxable income because it goes straight to charity.  

Second, for your clients owning inherited IRAs who are caught in the confusion of SECURE Act proposed regulations, a QCD could be very useful. The IRS does permit taxpayers to make QCDs from inherited IRAs, not just their own IRAs.  This option could be a welcome relief for clients who are facing the more stringent proposed IRS regulations governing the payout requirements for inherited IRAs. 

If you'd like to learn more about how the Community Foundation can help you and your clients or to answer your questions about philanthropy, reach out to Brandon Butterworth, Vice President of Philanthropic Services, at bbutterworth@cfrichmond.org 


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