Does Your Estate Plan and IRA Align with the SECURE Act?

Most dramatically, the Secure Act established a 10-year rule for withdrawing from inherited IRAs that eliminated the popular, but at times controversial, ability to “stretch” inherited IRAs for these beneficiaries.

It’s known as the SECURE Act—“Setting Every Community Up for Retirement Enhancement” Act of 2019. Some consider it more unsettling than secure, since this law changed withdrawal and tax rules for inherited IRAs for non-spouse beneficiaries. However, as reported by Think Advisor’s article, “9 Things to Know About IRA Beneficiaries Under the Secure Act,” the law led to other significant changes in estate planning.

The biggest headline is the end of the lifetime stretch for IRAs. Beneficiaries who are not spouses and don’t fall into specific categories and inherit a traditional IRA in 2020 or later must empty the account within ten years.

There’s a little bit of a wrinkle in the ten-year distribution rule. The experts initially said that heirs could take out as much or as little as they wished within ten years, including waiting until the very end of the ten years; the proposed regulations used the phrase “during,” meaning throughout the ten years. The IRS did not issue regulations until 2022, so the IRS waived Required Minimum Distributions (RMDs) for 2021, 2022, and 2023. This includes accounts inherited in 2022.

There’s a separate set of rules for nonqualified trusts and charitable entities—not people—to be aware of. If a traditional IRA owner or plan participant dies before the original owner would have been required to take their RMDs, the account must be emptied within five years. If the original owner dies on or after their RMD date, the rules require RMDs to be taken over the decedent’s single life expectancy. An estate planning attorney can guide you in avoiding paying unexpected taxes or penalties in these cases.

For a surviving spouse, there are numerous choices. They can take withdrawals as per the solo beneficiary framework, elect to take a spousal rollover, use the life expectancy numbers, or take a lump-sum distribution. Every situation is different and needs to be evaluated to determine which is best for the spouse.

A spouse who inherits a traditional IRA can do a spousal rollover, transferring funds into a new or existing IRA. You can only do this if the spouse is the only beneficiary. This method lets the IRA continue to grow, which is an attractive option if the surviving spouse is younger than the deceased spouse. If the spouse is under 59 ½, they’ll be subject to the regular IRA distribution rules.

There’s a separate rule for spouses who are more than ten years younger. They’ll have to use the IRS joint and last survivor table. There’s no 10% early distribution penalty if they withdraw funds. One fine point: the account name must include the deceased owner’s name to be sure it’s an “inherited” or “beneficiary” IRA.

If a minor inherits the IRA, they are considered a minor until they turn 21. They must also be the minor child of the original owner—not a nephew, niece, or family friend. The ten-year rule kicks in once they become a legal adult at age 21.

Disabled and chronically ill IRA beneficiaries are subject to separate rules. However, there are nuances to be aware of. They must have a condition and are unable to live a “normal” life (working, two activities of daily life, etc.). Their condition or disability must be one expected to result in death or long continued and indefinite duration.

Speak with an estate planning attorney and your CPA before putting IRA assets into a trust. In most cases, trusts are not permitted to own IRAs if the original IRA owner is living. Certain trusts don’t qualify as eligible or non-eligible designated beneficiaries. To figure out if your estate plan and IRA align with the SECURE Act, book a call today!

Reference: Think Advisor (March 11, 2024) “9 Things to Know About IRA Beneficiaries Under the Secure Act”

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