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Inherited IRAs: How the SECURE Act can affect your distributions after death

On December 20, 2019, President Trump signed the Setting Every Community Up For Retirement Enhancement (SECURE) Act. There has been a lot of buzz around the SECURE Act, especially due to the provisions that affect distributions from inherited individual retirement accounts (IRAs).

The largest change the SECURE Act made was to basically eliminate “Stretch IRAs”. “Stretching” an IRA was a useful estate planning tool, as it enabled the beneficiary of an IRA to take Required Minimum Distributions (RMDs) over their life expectancy. For a young beneficiary this could mean deferring distributions for 30 or 40 years while the remaining plan assets grew tax-free until distribution.

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Under the provisions of the new SECURE Act, non-spousal and other designated beneficiaries must deplete the retirement account (take distributions) within 10 years unless they can qualify as an “eligible designated beneficiary”.

Eligible designated beneficiaries can avoid the new 10 year rule and continue to receive RMDs over their life expectancy. Eligible designated beneficiaries are the surviving spouse, minor children, certain chronically ill or disabled beneficiaries, and individual beneficiaries who are not more than 10 years younger than the deceased retirement plan owner. In the case of a minor child, their 10-year clock starts ticking the day they reach the age of majority. After the death of any of these eligible designated beneficiaries, the remaining account balance must be distributed within 10 years.

The SECURE Act left unchanged the RMD rules for a non-designated beneficiary (decedent’s estate, charity, or a trust that does not qualify as a see-through trust). The plan must be distributed within 5 years if account owner dies before RMD age, or distributed over the account owner’s remaining life expectancy if died on or after RMD.

An important thing to remember is that these new rules only apply to the traditional IRA/qualified retirement plans of taxpayers who die after December 31, 2019. There will be no effect on the disbursement requirement of IRAs inherited prior to 2020.

The rules for Required Minimum Distributions are complicated so be sure to check with your tax adviser.

Please consult your Henry + Horne tax professional for questions or assistance.

Haley Braun