Have you ever made your weekly trip to your mailbox, found it full, walked back to your home and dropped the pile on your counter only to realize weeks later there was an important piece of mail in that pile that you didn’t see? Me neither!
Something similar happened in December when Congress passed the Setting Every Community Up for Retirement Enhancement or “SECURE Act” updating the laws governing retirement accounts. This was passed during a busy time of the year, then a pandemic hit, and somewhere in there we had tax time so this information kind of got lost. Well, along with raising the age you have to begin taking distributions from your retirement accounts from 70 ½ to age 72, the SECURE Act eliminates the “Stretch” option for most of those inheriting IRA accounts. The SECURE Act introduced the new 10-Year Rule as the replacement. This requires those inheriting a retirement account to empty the account by the end of the 10th year following the year the original IRA owner’s death.
As with most changes made by the government, “simplification” isn’t a priority. In fact, the SECURE Act creates a new category of beneficiaries – “Eligible Designated Beneficiaries” and three potential scenarios for successor beneficiaries of retirement accounts.
Let’s look at a couple of examples;
1)Gert, the owner of a $500,000 IRA passes away in 2020 and left it to her spouse, Alvin. Alvin can utilize the life expectancy method and “stretch” the IRA distribution over his lifetime and spread the tax liability out.
If instead,
2)Trina, her daughter inherits the IRA. Trina has until December 31, 2030 to empty the account. Trina would have some options on how to withdraw the funds but without thoughtful planning, this could cause significant tax consequences for Trina.
If Trina designates Mack as a beneficiary of the inherited IRA and then Trina passes away in 2025, Mack only has the balance of Trina’s 10-Year Rule or 5 years to empty the inherited account.
As with every rule, there are exceptions. We are here to help our clients evaluate and select the best strategy for their situation. If you know anyone inheriting a retirement account, please share this article.