SECURE Act Implications for Inherited IRAs

An Important Consideration for Estate Planning

We are already one full month into the 2020 year, and I hope it is off to a good start for you and your family.

One of the new laws that took effect in January that has generated a lot discussion and opinions is the new SECURE Act (Setting Every Community Up for Retirement Enhancement). The Impact of the SECURE Act and how it will affect your income taxes and any estate plans you may have is something that you will need to consider in your financial planning.

All taxpayers should review these changes, but the most impactful will be the change to the “stretch” ability of inherited IRAs and other retirement accounts.

Previously, most individuals inheriting an IRA had the ability to stretch the required payments from the IRA (RMDs – Required Minimum Distributions) over their expected life spans. This “stretch” ability formed the basis for many estate plans that you may have developed for your families. It allowed the current owner to manage to whom and when IRA assets would be distributed and, therefore, spent. Under the old rules, an individual dying at age 75 with a beneficiary child age 45 could have the RMDs paid out over the child’s life expectancy – 45 years – rather than the owner’s expected life expectancy – 20 years. This allowed the IRA owner to provide a steady income stream for a child for the child’s expected life.

This no longer is possible under the SECURE Act. Unless the beneficiary is a surviving spouse, the IRA beneficiaries will have 10 years to receive the income from the inherited IRA. No more extended withdrawal periods. The 10-year rule does not require that amounts be withdrawn each year or specify how much must be withdrawn each year. The beneficiary could let the inherited IRA sit for 10 years, grow tax free, and then take the balances at the 10-year mark. There are some exceptions for minors and individuals who are close in age to the decedent that we can discuss in person.

This new rule will cause problems for anyone who has plans to leave their IRA to a trust. The trusts need to be reviewed to ensure they are still viable under the SECURE Act, as the 10-year rule still applies with trusts. The income can be managed, but taxation at the trust level can be onerous.

There are other provisions in the SECURE Act that can and will be beneficial to you., i.e., adoption/birth related withdrawals, and some minor changes to the 401k rules, etc. There are also other tax and planning strategies that can reduce the negative impact of these changes to the IRA. We can discuss these aspects when we meet for your tax and financial planning.

The content provided herein is based on our interpretation of the SECURE Act and is not intended to be legal advice or provide a tax opinion. This document is a summary only and not meant to represent all provisions within the SECURE Act.