Changes to IRA Accounts

The “SECURE Act” is effective beginning January 1, 2020. In a law passed by Congress, it makes major changes in the way required minimum distributions in IRA and Roth IRAs are treated as you age and when they are inherited by your beneficiaries. Prior to the SECURE Act, all owners of an IRA were required to begin taking required minimum distributions (RMDs) from their IRAs once they obtained 70 ½. Once an account owner passed away, the RMDs a non-spouse beneficiary must take was determined based on the life expectancy of the beneficiary. For example, if you designated a 40-year old child as a beneficiary of your IRA, he or she may stretch those RMDs across his or her life expectancy, which allowed beneficiaries to stagger the income taxes across a larger period of time while taking advantage of tax free growth in the funds remaining in the IRA.

Following the passage of the SECURE Act, IRA owners were allowed to postpone RMDs until age 72, allowing for more time for tax-free growth for the account owner. Also, this law removes the prohibition on IRA contributions after age 70 ½, allowing individuals to contribute to their IRAs for a longer period of time. This is good for those who are trying to reduce their taxable income for as long as possible, but it can also result in larger IRAs at the time of death, which will then be passed to your beneficiaries and subject to their income tax calculations.

Effects of the SECURE Act on inherited IRAs

Under the SECURE Act, all IRAs or Roth IRAs, with some exceptions, must be paid to the designated beneficiary within 10 years following the owner’s death. Of course, this means that the entire balance of an inherited IRA will be taxable to the beneficiary within 10 years following the owner’s death. This could lead to significant taxes for the beneficiaries of IRAs. Exceptions to this 10-year rule include beneficiaries who are the owner’s spouse, the owner’s minor children, disabled, chronically ill, or are less then 10 years younger than the account owner. If one of these exceptions are met, or if the IRA is left to a trust in which one of these persons is a direct beneficiary, the old life expectancy rules will apply.

What about your existing trust?

If you have a trust as a beneficiary of an IRA, it is important to think about how this law will affect the tax ramifications for your beneficiaries following your death. If you have minor children or children with disabilities, you can create a direct beneficiary trust or a supplemental needs trust for the benefit of that person to avoid the 10-year rule. If you have not done so recently, this is a good time to have your trust reviewed to ensure that it is compliant with this new law and the tax calculations are still advantageous to your beneficiaries.

What should I do?

Give us a call to schedule an appointment to review your estate plan and to discuss any questions that you have about your retirement plans. If you have any charitable causes which interest you, or any non-profit organizations which you wish to support, these are great beneficiaries for IRAs because they are not subject to income tax. Leaving your IRA directly to a charity, or to a charitable trust, is a great way to maximize the effect of your money and to ensure that the money left to your family is not going to leave them with income tax ramifications down the road. If you have traditional or Roth IRAs, this is a great time to review your existing designations and estate plan.