The SECURE Act: Changes for IRA Beneficiaries
On previous blog posts, we have examined the general tax law reforms within the SECURE Act. We have also looked at the modifications for the Required Minimum Distributions. Now, we want to examine the changes that the estate planners are talking about the most - the inherited IRA beneficiary rules.
Elimination of the "stretch IRA"
Perhaps the change requiring the most urgent attention is the elimination of the “stretch IRA”. Historically, non-spouse beneficiaries who inherit traditional IRA and retirement plan assets were able to spread distributions — and therefore the tax obligations associated with them — over their lifetimes. This ability to spread out taxable distributions after the death of an IRA owner or retirement plan participant, over what was potentially such a long period of time, was often referred to as the "stretch IRA" rule.
Under the new law, for retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs.
Not every beneficiary will be subject to the new rules. There are four groups of designated beneficiaries who will not be subject to the 10 year rule:
Spousal beneficiaries
Disabled or chronically ill beneficiaries
Individuals not more than 10 years younger than the decedent
Minor children of the decedent, but only until they reach the age of majority
Within the 10 year period, there are no distribution requirements. Therefore, the beneficiaries will have some flexibility to timing distributions from the inherited accounts. As long as the account balance has been distributed by the end of the 10th year after death.
IRA Trust Beneficiaries
Many retirement account owners have named trusts as potential beneficiaries of their accounts. How will they be affected by the new rules? Well, it is definitely a good time to review your beneficiaries and trust documents to see how the SECURE Act might alter the existing estate plan.
In general, trusts created to serve as the beneficiary of a retirement account are drafted in such a manner as to comply with the “See-Through Trust” rules, which allow the trust to stretch distributions over the oldest trust beneficiary. However, these types of trusts could be unfavorably impacted by the Secure Act. Future IRS guidance will be needed to address the full impact of the Secure Act on these types of trusts.
In addition to possibly reevaluating beneficiary choices, traditional IRA owners may want to revisit how IRA dollars fit into their overall estate planning strategy. For example, it may make sense to consider the possible implications of converting traditional IRA funds to Roth IRAs, which can be inherited tax free. Although Roth IRA conversions are taxable events, investors who spread out a series of conversions over the next several years may benefit from the lower income tax rates that are set to expire in 2026.
It will take some time to unpack all the different planning strategies that have emerged from the passage of the SECURE Act. However, we know that it is a good time to talk about how beneficiaries will be affected by the new law. And examine any trust documents to make sure that they still reflect your wishes. We will continue to discuss all these implications with our clients, but if you have any questions about your estate plan, please give us a call.