Final Answer:
According to IRS rules, a non-spouse beneficiary inheriting an IRA from someone who had not yet reached the age of 70 1/2 has the option to choose a distribution method known as the "stretch IRA" or "inherited IRA," allowing the beneficiary to take distributions over their life expectancy or within ten years of the original owner's death, depending on certain circumstances.
Step-by-step explanation:
When a non-spouse beneficiary inherits an IRA from an individual who had not reached the age of 70 1/2, IRS rules provide specific distribution options. One primary option available is the "stretch IRA" or "inherited IRA." Under this method, the beneficiary has the choice to take distributions over their own life expectancy, which allows for a longer distribution period and potentially smaller annual distributions, minimizing the impact of taxes.
However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced changes affecting inherited IRAs. For beneficiaries inheriting IRAs from individuals who passed away after December 31, 2019, the stretch option is limited, and beneficiaries might be required to withdraw the entire inherited IRA within ten years of the original owner's death, subject to certain exceptions. This ten-year rule applies unless the beneficiary qualifies for an exemption, such as being a minor, disabled, chronically ill, or within a similar limited set of circumstances.
Understanding these rules is crucial for non-spouse beneficiaries as it determines the distribution timeline and tax implications associated with the inherited IRA. Choosing the appropriate distribution method can impact the amount of taxes owed and the longevity of the inherited IRA, influencing the beneficiary's financial planning and tax strategies.