Most provisions of the SECURE Act, signed into law this past December, were aimed at making retirement planning more accessible to a greater number of Americans. However, one requirement regarding Individual Retirement Accounts (IRAs) might complicate the estate planning process for a number of individuals and families.
The requirement of concern applies to inherited IRAs, and the manner in which funds are withdrawn from the account. Formerly, withdrawals from an inherited IRA could be stretched over a beneficiary’s lifetime, leading to the nickname, “stretch IRAs”. That provision has ended, however, and a time limit will now apply.
In the event that you wish to pass your IRA to a child or another heir (or if you will become the beneficiary of an inherited IRA), pay special attention to this rule: As of January 1, 2020 and going forward, funds within an inherited IRA must be withdrawn, and taxes paid accordingly, within ten years.
This new rule does not apply to IRAs inherited in 2019 or before. In those cases, the old rule allowing “stretch IRAs” still applies.
Certain exceptions do apply to the ten-year rule. Complete withdrawal of funds will not be required within the ten year period if the beneficiary of the account is:
The spouse of the deceased account holderA minor child of the deceasedA disabled child of the deceasedA child of the deceased, and suffering certain chronic illnessesLess than ten years younger than the deceased
The elimination of stretch IRAs can pose some challenges to beneficiaries. For example, the size of withdrawals necessary to meet the ten-year requirement could present additional income tax challenges for the new account holder.
To ensure that final wishes will be carried out by beneficiaries – and that they will be able to do so without undue tax burdens – review your estate plan with an experienced estate planning attorney now.