Just before the end of 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law. The law, which came into effect on January 1, 2020, opens up opportunities for retirement in two specific ways:
- The age for required minimum distributions (RMDs) from retirements plan and individual retirement accounts (IRAs) increased from 70 1/2 years of age to 72 years old. This means you do not have to start deducting from your IRA until the age of 72 if you had not yet turned 70 1/2 by January 1, 2020.
- There is no longer a maximum age for retirement contributions. This means you can contribute to a traditional IRA at any age so long as you earn income.
The law, however, places an unexpected restriction on inheritance in an important way. The new limitation is specific to non-spousal beneficiaries of inherited IRAs. Many people with estate plans in Tennessee as well as throughout the United States will be affected by this new law. Here are the details as to how this new law may impact Tennessee estate plans and IRA beneficiaries.
What Is the New Limitation on Non-Spousal Beneficiaries of Inherited IRAs?
When a person inherits an IRA, one of the benefits had been the ability to stretch RMDs over a lifetime or life expectancy. In doing so, beneficiaries were able to maximize tax advantages. Beneficiaries only had to pay income taxes on the distributions they took or received. Depending on the beneficiary's age, this was a useful tool – they could defer taxes over a much longer period of time. Non-spousal beneficiaries could choose to take only the required minimum distribution over their life expectancy.
Now, beneficiaries have only ten (10) years to drain their inherited IRA account. Whatever remains in the IRA account at the 10-year mark must be taken out and the account must be closed. So, if a beneficiary is relatively young, he or she can no longer defer taxes as they could under the old rule.
The new law is meant to increase tax revenue for the nation, but it hurts those who want to be financially responsible, too. It can also negatively affect certain trusts that receive retirement assets.
Fortunately, there are some people who this law will not affect, namely spouses, but there are other exceptions, too.
Are There Exceptions to the New Limitations on Beneficiaries?
As mentioned, the new limitation on IRAs and beneficiaries does not affect spouses. If your spouse dies and you are the beneficiary of an IRA, you do not have to worry about the 10-year rule. There are other exceptions as well. The new law does not impact:
- minor children (until they attain the age of majority at which time the 10-year rule sets in);
- disabled persons;
- the chronically ill; or
- beneficiaries less than 10 years younger than the deceased account owner (i.e. people the same age as the person who owned the IRA).
The Key Takeaway
Without the lifetime stretch, the new 10 year rule will speed up taxation of IRAs as well as create higher tax burdens on beneficiaries. So what is the solution? You may want to consider converting your IRA to a Roth IRA or creating a charitable remainder trust with the IRA to help your beneficiaries avoid this taxation.
Though not all new laws in the Secure Act will have a negative impact, it's wise to always have your estate plan reviewed by an attorney. Such a review will help make sure your estate plan takes into consideration these new laws and still continues to achieve your objectives.