In July of 2019, we warned that Congress had its eye on inherited IRAs as a source of increased tax revenue. On December 20, 2019, what we described as “the new Death Tax” became reality when President Trump signed the SECURE Act into law.
The new law will have a big impact on estate planning for retirement benefits. Anyone with a pre-tax retirement account (such as a traditional IRA, 401(k) or 403(b)) should review their existing plan for how those retirement accounts would pass at death. And if you don't have a plan, it's more important now than ever to make one.
What will change? Under the old rules, beneficiaries of inherited IRAs were free to enjoy tax-free growth by stretching withdrawals over their lifetime. You may have heard this referred to as a “stretch IRA.”
- Under the Secure Act, the “stretch IRA” concept has been eliminated for most beneficiaries. Lifetime stretch is now only available to spouses and disabled or chronically ill beneficiaries. For most other beneficiaries, the Secure Act speeds up the payment of income taxes by requiring beneficiaries to withdraw and pay income taxes on all funds in the retirement account within ten years. It's a double hit – accelerating the taxes is likely to increase them, plus the beneficiary loses years of tax-free growth.
- Minor children are allowed a little extra stretch – their ten-year clock doesn't start until they reach the age of majority.
- There are no required minimum distributions (RMDs) during the ten-year period, so imagine what happens when a beneficiary waits until the last day to withdraw the entire balance. Bunching all that income into a single tax year may have disastrous consequences.
If all of this sounds confusing to you, it's worth considering how well your beneficiaries will understand and manage the new rules.
Who should be paying attention to this news? Anyone who dies with funds in a traditional pre-tax retirement account may be affected. The new rules are especially important for retirement account owners who:
- Have large balances in their retirement accounts.
- Are not married or don't expect a surviving spouse to exhaust the couple's retirement funds.
- Have beneficiaries who are disabled or chronically ill.
- Have beneficiaries who are college-aged or younger.
Thoughtful estate planning can help protect your family from these issues and many others. Find out how by calling 251-431-6014 and scheduling a Family Wealth Planning Session with a Ladd Firm lawyer. Not ready to schedule? Sign up for our e-newsletter or like our Facebook page for important updates that could affect your estate.