50+ Lifestyles

SECURE ACT Changes IRA and Retirement Plan Inheritance Rules

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

As of January, most non-spouse beneficiaries of IRAs and/or Retirement Plans are now required to liquidate inherited accounts within 10 years of the owners death. This shorter distribution period could result in unanticipated and potentially large tax bills for non-spouse beneficiaries who inherit high-value IRAs. Any funds not liquidated by the 10-year deadline will be subject to a 50% penalty tax. That’s a harsh penalty!!

Under the new rules Margaret, for example, would have to empty the account within 10 years of her father’s death. Since she stands to earn her highest-ever salary during that time frame, the distribution could push her into the highest tax bracket at both the federal and state levels. Not only would the inherited IRA be depleted after 10 years, but Margaret’s tax obligations in the decade also leading up to her retirement would be much higher than she anticipated.

The beneficiary of a traditional IRA might want to spread the distributions equally over the 10 years, if possible, to manage the annual tax liability. By contrast, the beneficiary of a Roth IRA – which generally provides tax-free distributions – might want to leave the account intact for up to 10 years, if possible, allowing it to potentially benefit from tax-free growth for as long as possible.

Spousal beneficiaries can roll over the IRA assets to their own IRAs or elect to treat a deceased account owner’s IRA as their own (presuming the spouse is the sole beneficiary and the IRA trustee allows it). By becoming the account owner, the surviving spouse can made additional contributions, name new beneficiaries and wait until age 72 to start taking RMDs. A surviving spouse who becomes the account owner of a Roth IRA is not required to take distributions.

A beneficiary may also disclaim an inherited retirement account. This may be appropriate if the
initial beneficiary does not need the funds and/or want the tax liability. In this case, the assets may pass to a contingent beneficiary who has greater financial need or may be in a lower tax bracket. A qualified disclaimer statement must be completed within nine months of the date of death.

Retirement account owners should review their beneficiary designations with their financial or tax professional and consider how the proposed new rules may affect inheritances and taxes. Any strategies that include trusts as beneficiaries should be considered especially carefully. Other strategies that account include trusts as beneficiaries should be considered especially carefully. Other strategies that account owners may want to consider include converting traditional IRAs to Roth’s; bringing life insurance, charitable remainder trusts, or accumulation trusts into the mix; and planning for qualified charitable distributions.

During this month of February, we continue our virtual Community Meetings. Next ones are scheduled for February 21 and February 23.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.