The passage of the SECURE Act resulted in several impactful changes for retirees and for parties on both sides of an inheritance. Below are three takeaways and subsequent actions to consider:
For most who are not yet taking them, required distributions from IRAs are delayed.
- Required Minimum Distributions (often referred to as RMDs) are distributions you are required by the IRS to take from a retirement account, such as an IRA. The age at which these must begin is now 72 (rather than 70 1/2).
- To get specific, if you were born on or after 7/1/49, you can wait an additional year and a half to take distributions. This doesn’t preclude you from taking distributions, but you aren’t required to do so.
- But be careful--if you are already taking RMDs, you must continue taking them. Additionally, if you turned 70 1/2 in 2019, you still must begin taking RMDs by April of 2020.
- Bottom line: If you're age 70, be sure you understand whether this change impacts you. If you're close to age 70, check to see how this rule adjustment may change your financial plan.
No more "Stretch IRAs"
- Perhaps the most impactful change as it relates to individual financial planning is the removal of the "stretch IRA" for non-spousal beneficiaries.
- When you inherit an IRA from someone other than your spouse, you must begin taking annual distributions. This is not new. But, if you inherited an IRA from someone who passed away on 12/31/2019 or before, you can spread (often referred to as "stretch") those distributions over your lifetime using the IRS life expectancy tables (this was the most tax advantageous strategy for an inherited IRA).
- The new rules require anyone inheriting an IRA from someone other than their spouse who passed away on 1/1/20 or after, to distribute that IRA over a 10-year period, not over their lifetime, as before. This can have a significant impact on the tax situation of the beneficiary. It also thereby can diminish what the beneficiary's after-tax inheritance will be compared to the old rules.
- If you anticipate leaving significant IRA assets to beneficiaries other than your spouse, you might want to consider adjustments to your estate planning.
- A few specifics to consider: if a beneficiary inherits when they're in their prime earning years (particularly business owners) with a long life expectancy, this change could increase their overall tax rate and significantly reduce what they receive of their inheritance, post-tax. This is particularly impactful if a beneficiary is filing single or if there are multiple beneficiaries in different income situations.
- For instance, if you have two children who will inherit your IRA 50/50 and one is a high wage earner, that individual will pay more in taxes and thereby inherit less. If this is concerning to you, there are planning strategies that can help.
- At this point, the most important thing is to make sure you understand how your beneficiaries may be impacted and talk to your financial planner about your options.
- Additionally, it's important to note that the stretch IRA is still available for spouses as well as beneficiaries who are chronically ill, disabled, or those who are not more than 10 years younger than the decedent.
Trusts as Beneficiaries of IRAs
- If your current estate plan names a trust as a beneficiary on your retirement account, be sure to read on. Depending on the language of your documents, under the new law, that trust-owned IRA may be subject to one RMD in the 10th year (compared to spreading it over 10 years), which may result in a larger tax liability (the larger the amount left to trust, the larger the tax impact). This is a complicated area of planning that may or may not impact your estate plan.
- The bottom line is that if you have a trust set up as a beneficiary on your retirement account, it is highly recommended that you revisit that structure with your estate attorney to make sure it still aligns with your wishes.
These can be complex matters that often require insights from various areas of expertise. With the right team, a plan can be implemented that aligns with your values and priorities but doesn’t require you to drive the process forward. Our team of professionals at PYA Waltman are here to help you navigate these changes. Our standard engagement structure allows us to collaborate with your legal and tax advisors. Call us if you’d like to learn more.
The opinions expressed are those of PYA Waltman. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
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