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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