Signed into law on December 20, 2019 and effective as of January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed many things about how retirement accounts will be handled going forward.
The most important change when it comes to passing along your IRA to your heirs is that most non-spouse beneficiaries will no longer be able to “stretch” the inherited IRA but instead will have to pay the entire IRA out within a 10 year period.
Beneficiaries who may be allowed to go beyond the 10 year period are spouses, disabled children, beneficiaries less than 10 years younger than you, and minor children (whose 10 year period starts when they turn 18).
Tax deferred retirement accounts primary benefit come from their tax deferred status. However, now most heirs will lose tax deferred gains because they cannot “stretch” the IRA taking smaller payments over a longer period of time. Additionally, they may be bumped into higher tax brackets as they declare larger amounts of income in those 10 years.
What options are there now?
- Creating a retirement trust to hold the assets for beneficiaries makes more sense now than ever before but must be assessed carefully. Accumulation trusts had a significant downside of maintenance costs of maintaining that trust for a long period of time, but that downside is negated because the trust now has a time limit built in by the SECURE Act.
- Educate your children or other beneficiaries. If your children inherit as adults and they take all the money out at once, there will be a significant tax hit. Similarly, if they do not take any money out until the 10th year, the large income will likely result in their being in a higher tax bracket and more taxes.
- Many retirement strategies are still possible and recommended depending on your situation. For example, if your income is low at the moment, could a Roth rollover result in fewer taxes?
Bottom Line: Talk to a professional. This law is brand new and there will likely be unknown repercussions and effects that were not anticipated. Think your personal situation through with a trusted IRA and retirement expert.