Inheriting an IRA can feel like a financial blessing—but without careful planning, it can also create unexpected tax consequences.

For families in Michigan, the rules changed significantly after Congress passed the SECURE Act (2019) and SECURE 2.0 (2022). If you inherited an IRA from someone who died in 2020 or later, here are the key points you should understand.

The End of the “Stretch IRA” for Most Beneficiaries

Before 2020, many beneficiaries could “stretch” required distributions over their lifetime, allowing decades of tax-deferred growth.

That strategy is now largely unavailable for most non-spouse beneficiaries (such as adult children).

Under current federal law, most non-spouse beneficiaries must withdraw the entire inherited IRA within 10 years. The 10-year period begins on January 1 of the year after the original owner's death.

Example:

If your parent died in 2024, the inherited IRA must be fully distributed by December 31, 2034.

There are exceptions for certain “eligible designated beneficiaries” (EDBs), including:

• Surviving spouses
• Minor children of the decedent (but only until they reach majority, after which the 10-year rule applies)
• Disabled or chronically ill beneficiaries
• Beneficiaries less than 10 years younger than the decedent

These beneficiaries may still qualify for lifetime distributions in some cases.

Important: Different rules may apply if the IRA is payable to an estate or certain types of trusts, rather than an individual beneficiary.

Annual RMDs May Be Required During the 10-Year Period

Many beneficiaries assume they can wait until year 10 and withdraw everything at once. That is not always correct.

Under current IRS regulations:

• If the original IRA owner had already reached their required beginning date (RMD age): Beneficiaries are generally required to take annual required minimum distributions (RMDs) during years 1–9, and fully empty the account by the end of year 10.
• If the owner had not yet reached their RMD starting date: No annual RMDs are required during the 10-year period—but the entire account must still be distributed by the end of year 10.

This distinction is critical. Missing required distributions can trigger penalties.

Michigan Income Tax Treatment

Inherited IRAs are primarily a federal tax issue, but Michigan income tax can also apply. In most cases:

• Traditional inherited IRAs → taxable as ordinary income federally
• Roth inherited IRAs → generally income tax-free if the 5-year rule has been satisfied (based on the original owner's Roth IRA holding period)

Michigan has been expanding its retirement income deductions. However:

• Inherited IRA distributions may qualify for Michigan's retirement income subtraction in some cases
• The availability and amount of the deduction depend on:
  • Your birth year
  • Your income level
  • Your filing status

Inherited IRAs do not automatically receive full exemption from Michigan income tax.

Even if Michigan tax is reduced, federal tax planning remains essential. Large withdrawals in a single year can:

• Push you into a higher tax bracket
• Increase Medicare premiums (IRMAA)

Penalties for Mistakes

Failure to follow the rules can be costly.

• Missed RMD Penalty: 25% of the amount that should have been withdrawn (reduced to 10% if corrected in a timely manner)
• Failure to Empty by Year 10: Additional penalties may apply to undistributed amounts

While the IRS has provided temporary relief for some missed inherited IRA RMDs in recent years, relying on that relief is risky.

What If the IRA Holds Illiquid Assets?

Some IRAs hold assets such as:

• Closely held business interests
• Real estate

In these cases, a beneficiary may be able to take an in-kind distribution—receiving the asset itself instead of selling it.

However:

• The fair market value of the asset at the time of distribution is still taxable (for traditional IRAs)
• Proper valuation and documentation are critical

Special Considerations for Michigan Seniors

Inherited IRAs can create complications for individuals concerned about long-term care planning.

In Michigan Medicaid planning, the treatment of inherited IRAs depends on several factors, including:

• Whether distributions are required
• Whether the asset is considered “available”
• How the account is structured

In some situations, the account value may count toward Medicaid eligibility limits.

If you are over 60 and inherit an IRA—or if you plan to leave an IRA to a child who may need public benefits—careful coordination is essential.

The Bottom Line

An inherited IRA is not just an investment account—it is a tax planning project with a deadline.

• With proper planning, you can:
  Minimize income taxes
  Avoid penalties
  Coordinate withdrawals with retirement income
  Protect eligibility for benefits when needed

If you have inherited an IRA—or want to make sure your own IRA passes efficiently to your family—this is an area where small mistakes can lead to significant tax consequences.

Don't leave your IRA strategy to chance. I focus on helping my clients integrate retirement accounts into a comprehensive estate and long-term care plan. Contact me at (248) 469-4261 or via the online form for a preliminary chat. We'll cover your initial questions and determine the best path forward for your estate.