As most people were busy shopping for the holidays and/or viewing the impeachment hearings, Congress and the White House actually passed a new law — The SECURE Act — aimed at retirement. While many of the provisions in the SECURE Act will not have a major impact on high-net-worth individuals and families, there is one big exception: No more “stretch IRAs.”
Before 2020, an IRA that was inherited by a non-spouse, such as the children or grandchildren, could be paid out over the life expectancy of the beneficiaries. The required minimum distributions were based on a variety of factors, including the beneficiary’s age, life expectancy and account balance. Since withdrawals from most retirement accounts are taxed as income at the recipient’s highest rate, taking smaller withdrawals over more years provided a tax advantage.
But that tax advantage has been whittled down and could be a tax disadvantage. The SECURE Act mandates that non-spouse beneficiaries have up to 10 years to deplete the account. No more stretching out over a lifetime. This new rule applies not only to IRAs but also to inherited 401(k) accounts, as well as to Roth IRAs, although withdrawals from Roth IRAs are not taxed. This new rule took effect on Jan. 1, 2020, which means people already taking required minimum distributions from inherited retirement accounts will not be affected.
Most likely to be affected: If you are in your peak earning years and likely to inherit a sizable IRA or 401(k). In that situation, it’s good to be aware of what withdrawals may look like so you can plan accordingly. Also, if the IRA or other retirement account you inherit is (or will be) in a trust, you should find out the payout provisions of the trust to avoid a large payout at year 10. We are helping clients with both of these scenarios.
I will have more on the SECURE Act in the article I am writing for the January 2020 issue of Navigator, our digital quarterly.
