The SECURE Act was signed into law during the final weeks of 2019 and has important implications for retirement planning. Previously, if an IRA or other retirement account owner died and named their child as the account beneficiary, their child could establish an Inherited IRA and elect to spread out distributions over their lifetime. This provided additional time for the IRA assets to grow tax-deferred (tax-free for a Roth) and resulted in smaller annual distributions (taxable if a traditional IRA) to the child. The new law requires Inherited IRAs be distributed to non-spouse beneficiaries over a 10-year period (with some exceptions). This applies to both Traditional and Roth IRAs.
- Less time for tax-deferred / tax-free growth
- Larger distribution amounts which could result in taxation at higher income tax brackets
- It is important to review your current IRA distribution plan. There may be situations where it is beneficial from an income tax perspective to draw more than the required minimum distribution. Below are a couple examples:
- For a traditional IRA, if the account owner is in a low income tax bracket and the children/beneficiaries are in a high income tax bracket there may be family tax savings by having the account owner withdraw more than the required distribution.
- For Roth IRAs, in the past many have not considered withdrawing funds because of the tax-free compounding that was available over their beneficiaries’ lifetime. With the new 10-year distribution requirement there may be situations where drawing on one’s Roth IRA makes sense. For example, if the account owners cash needs exceed the amount of their required distribution and the only available assets are their traditional and Roth IRAs, it may be desirable to draw from their Roth. This is especially true if the beneficiaries are in a lower income tax bracket so won’t be impacted as much with future distributions from a traditional inherited IRA.
- There may be problems if a Trust is the IRA/retirement plan beneficiary. You should review your plan with your financial planner and/or attorney to see if any changes are required to the trust agreement. A Trust is often named as the retirement account beneficiary to control the individual beneficiary’s access to funds.
- Naming a Charitable Remainder Trusts as your retirement account beneficiary may be an attractive alternative to consider, especially if you wish to exercise some control over the beneficiary’s access to funds and have a charitable interest.
Another important change – for those born after 6/30/1949, distributions from IRAs or retirement account aren’t required until you reach age 72, versus age 70 ½ under previous law.