How New Retirement Rules Could Affect Your IRA Beneficiaries
by Pauline Quinn, MSAPM
Registered Principal, RJFS
Just when you thought you had a handle on the new SECURE Act, here is another wrinkle to consider: Make sure you are aware of how your beneficiaries will receive inherited IRAs/401ks and what the distribution requirements are.
New 10-Year Withdrawal Rule for Non-Spouse Beneficiaries
Under the new SECURE Act legislation, which stands for “Setting Every Community Up For Retirement Enhancement,” beneficiaries of inherited IRAs will need to withdraw all the money from the IRA/401k within 10 years. The only flexibility for tax-planned distributions of inherited IRA’s is now within the new allotted 10 year period. This rule also applies to inherited 401(k) accounts, regardless of whether they are rolled into IRAs, as well as Roth IRAs.
Previously, non-spousal beneficiaries could choose to take required minimum distributions over their life expectancy, rather than taking all the money out of the IRA /401k within a five-year period. This extended type of distribution was previously known as a “stretch IRA.” However, that tax advantage went away when the SECURE Act went into effect on 1/1/2020. The new Act provides one option: to take up to 10 years to distribute all the money in the account. In year 10, all the money must be out of the account regardless of tax considerations.
There are a couple of exceptions to the 10-year rule:
- A surviving spouse can withdraw only the required minimum over the survivor’s life expectancy.
- A minor child and people with disabilities can take distributions as a surviving spouse. (But here’s yet another wrinkle: once a child reaches the age of majority, the 10-year rule clock starts ticking.)
Beneficiaries already taking distributions from inherited accounts before 1/1/2020 will be grandfathered under the old distribution rules.
Special Considerations for Beneficiaries of Pass-Through Trusts
Beneficiaries of individual retirement accounts may not see their inheritances for a decade under the newly passed SECURE Act, and when they do get the money, they may be taxed heavily for it.
The 10-year rule can be especially costly to people who inherit an IRA through a “conduit” or “pass-through” trust. This type of trust is used to limit the amount of money the beneficiary can withdraw from the inherited account every year. If the pass-through trust instructions are that the beneficiary is only to receive the required minimum distribution every year, be aware that the SECURE Act has no required minimum distributions for inherited IRAs. So, under the new rules, beneficiaries have to take all of the money in the 10th year.
In the case of an inherited IRA to a conduit or pass-through trust, that could mean the entire amount is inherited at once, with no opportunity to take out money during the 10-year wait so as to lessen the tax burden. Check with the professional that drafted the trust to see if your trust should be modified.
Talk with Your Financial Professional About How the SECURE Act Impacts You
The elimination of the stretch IRA alone has the potential to generate about $15.7 billion in tax revenue over the next decade, according to the Congressional Research Service. The SECURE Act as a whole is expected to generate $16.4 billion over the next 10 years.
The SECURE Act has a lot of moving parts. Some of the consequences of the new law (i.e. how it affects beneficiaries for one), are not necessarily intuitive. The new 10-year distribution rule for non-spousal beneficiaries is something to take into consideration when making your Estate Plan.
Get Personalized Support from Your Morey & Quinn Financial Advisor
The financial planners at Morey & Wealth Partners are here to answer your questions about the SECURE Act, and any questions you have about retirement plans. Call us for guidance and tailored financial strategies that help support your Well Planned Life.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
Toll Free: 877.541.6593
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Omaha, NE 68154
Any opinions are those of Pauline Quinn, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
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