Jan 29, 2020
The SECURE Act was passed by Congress in December 2019. SECURE stands for Setting Every Community Up for Retirement Enhancement, but the more we investigate the specific law changes the less it feels like it is an "enhancement".
When account owners of qualified plans including: IRA's, Roth IRA's, 401(k)'s, 403(b)'s, etc. pass away, non-spouse beneficiaries (children, grandchildren, trusts, etc.) inheriting these types of accounts must now distribute the money within 10 years. The SECURE Act eliminates the "stretch" provision that allowed non-spouse beneficiaries to "stretch" annual required minimum distributions (RMDs) over their life expectancy. Spousal beneficaries are still able to treat the money as their own and the RMD's now start at age 72 instead of age 70 1/2.
Let's look at an example of how the old stretch provision applied to a non-spouse beneficiary of an IRA. Let's assume a mother leaves her $500,000 IRA to her 55-year-old daughter, Rachel. Prior to the SECURE Act, Rachel would have been eligible to take required minimum distributions annually over her lifetime according to a life expectancy factor. For this example we assume that the inherited IRA earns 7% annually. The account grows over time and Rachel receives an increasing amount of RMD income each year. She also pays more in tax as her income increases. The balance of the account will be withdrawn at age 84, almost 30 years after she inherited the account.
Continuing with the same example, now, under the SECURE Act, Rachel will need to distribute the balance of the inherited account at the end of 10 years, at age 64. There are no longer required annual RMD's but rather the requirement to distribute the balance at the end of the 10-year period. If distributions are not planned tax-efficiently, in this example, Rachel would need to take a distribution of $983,756 at age 64--subject to income tax! That's a big tax bill.
It is now increasingly important for beneficiaries to plan distributions in the most tax efficient manner and perhaps rethink some retirement and inheritance planning. We are here to help!