New Tax Rules in SECURE Act to Affect IRA Fund Beneficiaries
New Tax Rules in SECURE Act to Affect IRA Fund Beneficiaries
Your beneficiaries have great flexibility during those 10 years to withdraw more funds when their income is lower, and withdraw less — or even nothing — in high-income years. For instance, if your beneficiary inherits five years before she is to retire, she could withdraw nothing during those working years and then start withdrawing over the last five years when her income and tax rate should be lower. That kind of planning can help minimize the tax. In addition, if you have more than one beneficiary, each beneficiary can use their own lower tax brackets over the 10 years, allowing them to minimize the overall tax paid by the beneficiaries, lessening the impact of the stretch IRA loss.
Did the SECURE Act Kill the Stretch IRA
What the new rules say about paying taxes on inherited funds
iStock / Getty Images Starting this month, IRA expert Ed Slott is taking your questions about Individual Retirement Accounts. He starts by addressing what to do about new rules in the 2020 SECURE Act that affect most beneficiaries who inherit tax-deferred funds starting this year. Years ago, I followed your recommendations regarding setting up a stretch IRA. I understand that the SECURE Act has eliminated that provision to pay for the rest of the act's benefits. What suggestions do you have going forward? —J.F. I'm going to assume you mean that you are the IRA owner and you are referring to setting up your IRA so that your beneficiaries can take advantage of the stretch IRA. (If you are the beneficiary, the has no effect on you since the section that eliminated the stretch IRA applies only to those who inherit in 2020 or later.)Let s start by explaining what the stretch IRA is and what changed
The stretch IRA is a made-up term (it's not mentioned anywhere in the tax code) to describe the ability of IRA beneficiaries to stretch distributions from an inherited IRA over their lifetimes. For example, a 30-year-old beneficiary would be allowed to stretch distributions over 53.3 years, according to IRS life expectancy tables that govern this.Ask Ed Slott
Confused about IRAs, 401(k)s, Roths, taxes and more related to saving for retirement? Ed has the answers. Email your questions to . That's a huge advantage for the beneficiary. In the above example, the 30-year-old would begin by withdrawing only 1/53.3th (roughly 1.8 percent) of the total account value as of Dec. 31 of the prior year. That's a very small amount, so the account can keep growing despite the withdrawals. Each year the size of the required minimum distribution (RMD) will increase slightly until the end of the 53.3 years, when the full balance must be withdrawn. The beneficiary, however, can always take more than the RMD. That is the basic stretch IRA concept. To qualify, the beneficiary had to be named on the IRA or plan beneficiary form and the beneficiary had to be a person, as opposed to an estate, charity or some trusts. (These nonperson beneficiaries have no life expectancy, so they cannot use the stretch provision.) This beneficiary in tax parlance is known as a designated beneficiary, and only a designated beneficiary can do the stretch IRA. Unfortunately, the SECURE Act did away with this for most people who inherit in 2020 or later and replaced it with a 10-year payout provision for most non-spouse beneficiaries. However, the SECURE Act carves out exceptions by creating a new class of designated beneficiaries now called eligible designated beneficiaries, or EDBs.Eligible Designated Beneficiaries
Spouses Minor children: Up to the age of majority — but not grandchildren Although the 10-year rule applies when the child does reach the age of majority (or age 26 if still in school) People with disabilities Chronically ill individuals Plus Individuals who are not more than 10 years younger than the IRA owner (for example, a partner, friend, sibling, etc.) Any designated beneficiary (including qualifying trusts) who inherited before 2020. These beneficiaries are grandfathered under the pre-2020 stretch IRA rules.Losing the stretch IRA may not be as terrible as you think br
Remember that this affects only your beneficiaries, not you, so it depends on how much you leave them. If you have a very large IRA, say $500,000 or more, then yes, any amount left to your non-spouse beneficiary will have to be withdrawn within the 10 years after your death, and that could mean a significant tax bill for your heirs. But even that can be managed, since the new law did away withYour beneficiaries have great flexibility during those 10 years to withdraw more funds when their income is lower, and withdraw less — or even nothing — in high-income years. For instance, if your beneficiary inherits five years before she is to retire, she could withdraw nothing during those working years and then start withdrawing over the last five years when her income and tax rate should be lower. That kind of planning can help minimize the tax. In addition, if you have more than one beneficiary, each beneficiary can use their own lower tax brackets over the 10 years, allowing them to minimize the overall tax paid by the beneficiaries, lessening the impact of the stretch IRA loss.