SECURE Act’s Impact on IRA Beneficiaries
The SECURE Act was passed and signed into law in December 2019 and it included some significant changes in the rules governing IRA’s. Many IRA owners applauded the fact that Required Minimum Distributions—the mandatory withdrawals that apply to traditional IRA’s—-now come into play at age 72 instead of age 70 1/2. These people are pleased with the fact that they can now postpone income taxes for an additional period of time. However, many of these same IRA owners have spent less time absorbing the impact of one of the other major IRA changes, that is, the elimination of the “stretch IRA” for non-spousal beneficiaries.
The new rules have no effect on spouses who inherit an IRA from their deceased marital partner. However, the changes may be dramatic for a non-spousal beneficiary who inherits as either a primary beneficiary or a contingent beneficiary. Previously, these individuals were permitted to “spread out” the required withdrawals (and the associated income taxes) over their remaining life expectancy. This could have been fifty years or more for a beneficiary in their early 20’s!! Under the new rules, these people must empty the inherited IRA within ten years, starting in the year following the original IRA owner’s death.
For small IRA’s, there should not be much that’s different, but larger inherited IRA balances could result in huge income tax increases. Inheriting children might be in their peak earning years yet are now forced to layer on additional inherited taxable income. This result might push them into higher tax brackets which means Uncle Sam takes proportionately more of someone’s lifetime savings. The ten year payout period is rather short when compared to typical life expectancies, further compounding the income layering effect.
We’re encouraging clients to consider these possible impacts on their plans for passing on wealth to future generations. Perhaps the bequeathing of other non-IRA assets must be changed in order to equalize net after tax amounts. Often the naming of IRA contingent beneficiaries is ignored or given little thought. The repercussions of such neglect, however, might cause future income tax headaches for heirs that could possibly have been avoided.
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.