The Setting Every Community Up for Retirement Enhancement Act of 2019, Pub. L. 116–94, was signed into law by President Donald Trump on December 20, 2019, as part of the Further Consolidated Appropriations Act, 2020 (The Secure Act). Future beneficiaries of retirement accounts have different rules than current inheritors. What follows is a brief description of some of the ways the new rules under The Secure Act may impact your future beneficiaries.
The Secure Act changes the way people will inherit money — are you affected by the new rules?
The new rules do not treat all beneficiaries the same. Beneficiaries of qualified retirement accounts, such as individual retirement accounts and 401(k) plans, now must withdraw all of the money out of those accounts within 10 years, instead of over their lifetime as was previously allowed (commonly referred to as the “stretch IRA” provision). An IRA is an individual retirement account. There are no required minimum distributions within that time frame, but the account balance must be zero after the 10th year.
The new rules do not apply to spouse beneficiaries. Spouses, disabled beneficiaries, and others under the exception, like minor children, will still be allowed to take distributions over their lifetime. Once the minor children reach the age of majority (18 for most jurisdictions) they will have 10 years to withdraw the assets in an inherited account, like all other beneficiaries.
The new legislation eliminated the ‘stretch IRA’ provision, but not everyone is impacted
Stretching the withdrawals in IRAs over the beneficiary’s lifetime meant paying less in taxes. The new rule will require beneficiaries to withdraw all of the money within 10 years and may result in higher tax bills. Beneficiaries who are still earning income based on work stand to be taxed greater because of their annual income will be high.
The effective date of The Secure Act is January 1, 2020 and does not apply to anyone who died before December 31, 2020. The new 10-yer rule only applies to accounts of beneficiaries who die in 2020 and beyond. Current beneficiaries of inherited IRAs and 401k plans will still be allowed to withdraw the required minimum distributions over their lifetime.
Speak with your financial planner
You and your beneficiaries should speak to a financial advisor to discuss the current inheritance and withdrawal plans. Withdrawals in particular should be planned, because they will be taxed at the beneficiary’s ordinary income-tax rate. Other factors include whether the beneficiary is at their peak earning years or close to their own retirement. Delaying the discussion or ignoring it will most likely cause your beneficiaries to pay more in taxes and other restrictions.