No More Stretch? The SECURE Act Changes Rules for Inherited IRAs
For decades, wealthy Americans have pursued estate planning strategies that “stretched” required minimum distributions (RMDs) from retirement plans over long periods of time. These strategies allowed savings and any earnings to grow and compound tax-deferred in IRAs over multiple generations.
Stretch IRA strategies included naming a child or grandchild as a non-spouse beneficiary on an IRA – or on a workplace retirement plan account that would later be rolled over into an inherited IRA – and establishing “see-through” trusts that spread distributions over the lifetimes of multiple beneficiaries
The SECURE Act changed the rules for inherited IRAs, effective on January 1, 2020, although there are a few exceptions to the rule. The National Law Review explained,
“Under the SECURE Act, however, the ‘stretch’ for most non-spouse beneficiaries has been reduced to a 10-year term. Put simply, the SECURE Act requires that most retirement assets inherited in 2020 and beyond be distributed at the end of a 10-year period.”
Exceptions to the 10-year rule include spousal, special needs, chronically ill and minor beneficiaries, as well as beneficiaries whose age is within 10 years of the IRA owner’s.
It is important to note that the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was passed on March 27, 2020 and waives all required minimum distributions (RMDs) for IRAs in 2020. This includes inherited IRAs, where the beneficiary would have needed to take an RMD in 2020. However, beneficiaries will need to understand the SECURE Act’s changes and how the changes may affect them after 2020.
It’s time to review your legacy or estate plan.
The shortened distribution period for inherited IRAs could significantly increase taxes for some Americans. In general, beneficiaries who are required to take larger than expected distributions may be pushed into higher marginal tax brackets. To avoid unwelcome tax consequences, it’s important to schedule an estate plan review with your estate planning attorney or financial advisor.
Conduit trusts that are designated beneficiaries for substantial IRAs are likely to need immediate attention. These trusts generally require trustees to immediately distribute IRA proceeds to trust beneficiaries. Under the SECURE Act, the amounts distributed from these trusts may be significantly larger than anticipated. That could create tax issues, as well as potentially undesirable outcomes for young, immature and less responsible beneficiaries'
If a trust is the designated beneficiary for your IRA, talk with your estate planning attorney to determine how the SECURE Act may affect your plans. It’s possible you will need to put a new strategy in place to achieve your estate planning and legacy objectives.
While changes to inherited IRA rules are unlikely to be popular, many of the provisions in the SECURE Act will be positively received. For instance, the new law makes it possible for parents to help pay student loans with assets in 529 plans. In addition, eligible part-time workers now qualify to participate in workplace retirement plans.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.