An alert reader asked me to elaborate a bit on the SECURE Act in relation to the effect on inheriting IRAs. This has received a lot of press, so I guess a lot of people are worried about it. Is it possible all the press the SECURE Act has received is making people worry? Hmmmm.
As a review, before January 1, 2020, if a person with an IRA, Roth IRA or workplace retirement account died, their spouse would inherit the retirement account as if it had always belonged to the spouse. Meaning, the spouse could enjoy the tax-deferred/free growth and take money out on their own schedule.
Non-spouse retirement account inheritors had two options: First, they could empty the retirement account with 5 years of the original owner’s death. Second, they could take required minimum withdrawals from the retirement accounts based on the beneficiary’s age. This allowed younger inheritors to take small withdrawals each year, leaving the bulk of the account to continue to grow in a tax-preferred way through the beneficiary’s lifetime. It was called the Stretch IRA. Nifty, eh?
Not so, says Congress!
Tax-preferred retirement accounts were put into place to help people save for their own retirement and spend down during their lifetime. Not as a way for the wealthy to avoid taxation on investments for two or more generations. Enter the SECURE Act.
Now, instead of being able to extend the payments out of retirement accounts over his/her lifetimes, non-spouse inheritors must deplete the account within 10 years of the death of the original account owner.
There are exceptions (what IRS rule would be complete without them?):
- The surviving spouse of the employee.
- A child of the employee who has not reached the age of majority. When the child reaches the age of majority, the 10-year clock starts ticking
- A disabled individual.
- A chronically ill individual.
- An individual who is not more than 10 years younger than the employee who died.
So, dear readers, what does this mean for you?
For 99% of the population, I’m guessing the answer is “not much.” Why? Well, before I became a cynical middle-aged crone, I worked the front counter at a Fidelity branch office. Anecdotally, I can tell you that in spite of the dead parents’ wishes, most non-spouse inheritors would cash out Mom and Dad’s IRAs (regardless of taxes) before the grass grew on their graves and use the money to buy a car, pay credit card debt, or enhance their tattoo collection.
Of course, most of my clients who have inherited IRAs are using the stretch provision (because they are smart) and can continue to do so. The new 10-year deadline applies to people whose benefactors pass away starting in 2020.
As always, there are tactics to pass along assets in a tax efficient manner. And, as always, the question for you, the saver, is this: Do you want to pay the taxes on your kids’ inheritance, or do you want to have the most tax-efficient retirement for yourself? You can’t do both. Once you’ve answered that question, talk to your financial adviser and estate attorney to create a plan of spending/gifting/wealth transfer that meets your goal.
