The SECURE Act of 2019 significantly changed the rules for inherited IRAs, but not all states have aligned their tax code with the new federal law. In Arizona, the rules for inherited IRAs largely mirror federal law, with a few key differences that beneficiaries need to understand.

Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA after January 1, 2020 can no longer "stretch" distributions over their lifetime. Instead, they must withdraw the entire account within 10 years of the original owner's death. This is known as the "10-year rule." However, there are exceptions for eligible designated beneficiaries, including surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries less than 10 years younger than the original IRA holder.

Arizona follows the federal 10-year rule for inherited IRAs, but with an important caveat. While beneficiaries can take distributions at any time during the 10-year window, Arizona requires beneficiaries to take annual Required Minimum Distributions (RMDs) in years 1-9 if the original account owner had already started taking RMDs. This is different from federal law, which has no annual RMD requirement as long as the account is emptied by the end of year 10.

Another key difference is how Arizona treats distributions for state income tax purposes. Federally, inherited IRA distributions are taxed as ordinary income. But in Arizona, beneficiaries can deduct up to $25,000 of distributions from inherited IRAs on their state income tax return. This deduction phases out for taxpayers with income over $75,000 (single) or $150,000 (married filing jointly).

Properly navigating the rules for inherited IRAs can be complex, especially when state law diverges from federal law. As a Personalized CFO, I help clients understand their options, avoid costly mistakes, and create an optimal withdrawal strategy aligned with their comprehensive tax and estate plan. If you've recently inherited an IRA or want to ensure your beneficiary designations are set up properly, let's have a conversation.