The President signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Now, for decedent’s dying in year 2020 and beyond, the Act mandates the maximum period over which an inherited IRA can be withdrawn is 10 years for most non-spouse beneficiaries. The new rule also affects participants in Qualified Plans such as 401(k), Profit Sharing plans, 403(b), 457(b), cash-balance plans and lump sum options in a pension plan.
Under prior law, the beneficiary of an inherited IRA could stretch the distributions out over his or her lifetime, taking out only the required minimum distribution (RMD), and paying the resulting taxes on the distribution, each year. Now, there are no RMDs each year, however, the beneficiary must take out the entire balance of the inherited IRA in the 10 year period following the decedent’s death. This will significantly increase the amount of taxes paid on inherited IRA funds. The drafters of the Act estimate the tax increases to the Treasury will be $15.7 billion over 10 years.
The rules for spouses stay the same as under prior law. If you leave your IRA to your spouse, he or she can roll over the funds into their own IRA and continue the tax deferral benefits based upon their remaining life expectancy.
Other “eligible beneficiaries” who are not subject to the 10 year rule and may use the stretch provisions are: a disabled individual; a chronically ill individual; an individual who is not more than 10 years younger than the employee or IRA owner; and a child of the employee or IRA owner who has not reached the age of majority (when the child reaches the age of majority, the 10 year rule starts to apply).
We are waiting on Regulations from the IRS as to the interpretation of some of the details of the SECURE Act. For instance, what is the “age of majority” for a child? Is it 18 or 21 or 26 (the top age a parent can keep their child on their health plan)?
If you are the beneficiary of a retirement fund, you should work with a tax professional to determine the best distribution strategy for your personal situation. You aren’t required to take the funds evenly over the 10 year period. You can take as a lump sum upfront, postpone it to the end or spread the payments over the 10 year period in equal or unequal payments.
Delaying distributions is logical for Roth IRAs if you can afford to do so. Roth IRAs can be withdrawn tax-free at any time during the 10 year period, however, retaining the funds in the Roth IRA generates tax-free growth.
Excerpts taken from The Guide to Stretch IRA Rules Under the SECURE Act: What Has Changed and What to Do written by Sequoia Financial Group.
If you have any questions on estate planning, please call Karen L. Stewart, Attorney and Counselor at (248) 735-0900. For more information, please see my website, customestateplans.com.