Did the SECURE Act Just Change Your Retirement Plan?

In December of 2019, Congress passed a law called the SECURE Act, making big changes to retirement and estate planning. (“SECURE” stands for Setting Every Community Up for Retirement Enhancement.) One of the most significant changes is what happens if you inherit an IRA.

The old rules gave several choices to someone who inherited an IRA. One option was to withdraw only a small amount from the inherited account each year. The withdrawal amount was based on the beneficiary’s age, and it allowed the bulk of the inherited IRA to continue to grow tax free. (The beneficiary paid tax on only the small amount that they withdrew.)

But not anymore.

How the SECURE Act Affects Inherited IRAs

Now, the beneficiary must withdraw all of the money in an inherited IRA by the tenth anniversary of the plan holder’s death. And all of those withdrawals are subject to income tax at the beneficiary’s tax rate. The law does not require minimum distributions during that ten-year period, but it is no longer possible to stretch out withdrawals over the beneficiary’s life.

Certain people are not subject to the ten-year rule:

• surviving spouses
• people with certain chronic illnesses
• people with certain disabilities
• children under the age of 18 (after they turn 18, the ten-year rule applies), and
• beneficiaries who are less than ten years younger than the deceased plan holder.

Though the SECURE Act is new, and it will take time for lawmakers to write regulations that fill in the details, these changes are worth thinking about for most of us.

How to Plan for the New Rules

If you think you will inherit an IRA. If you don’t think you’ll qualify for an exemption, plan to inherit the IRA under the ten-year rule. That means paying taxes on your withdrawals, often during the time when you are earning your peak income. (That’s true for many people in their 50s.)

If you plan on giving an IRA. For those who plan on giving an IRA to their children or grandchildren, you’ll want to consider how best to do that. Some financial planners are encouraging some people to convert their IRAs to ROTH IRAs. Doing so would require you to pay income tax on the conversion during your lifetime, allowing your heirs to withdraw money tax free. Others might set up trusts to hold the IRA assets after withdrawal so that someone can manage the money for a beneficiary over time, after paying all the taxes. And for those who would like to give money to charity, naming a charity as an IRA beneficiary is a smart move, because charities won’t have to pay tax on withdrawals.

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