Avoiding Deemed Distribution Treatment for Inherited Retirement Funds

by Prof. Robert Bloink and Prof. William H. Byrnes

It’s no secret that the rules governing inherited IRAs and 401(k)s have become increasingly complicated in post-SECURE Act years. Non-spouse beneficiaries who inherit retirement accounts must deal with a host of new complications—and the related tax issues—when evaluating their required minimum distributions (RMD) obligations after the death of the original account owner. RMD planning receives a significant amount of attention (as it should) in determining the best way to minimize overall tax liability. Unfortunately, beneficiaries often overlook one simple step that can inadvertently cause the entire inherited account balance to become currently taxable. The inherited account must be moved to a beneficiary account unless the beneficiary was the original owner’s spouse—and if the wrong method is used for moving the account balance, all of those tax minimization opportunities can be lost.

Moving the Account Balance