The SECURE Act that was passed at the end of 2019 changed how you can pass down your retirement accounts to loved ones. That change could mean that you need to re-think your estate plan and tax-minimization strategy. How might the SECURE Act impact your estate plan?
Your retirement accounts – IRAs, 401(k)s, or other employer-sponsored plans that have pre-tax money in them – grow tax-deferred where you pay taxes on that money at a later date, usually retirement. If there is still money in those retirement accounts at the time of death, your beneficiaries are now required to pay the taxes owed on those accounts. This is an income tax timebomb. Your beneficiaries get taxed on the IRA distribution as ordinary income on top of the income they already make for that year.
Prior to the SECURE Act, your beneficiaries could distribute your retirement account distributions across their remaining lifetimes. Beneficiaries had more flexibility when taking distributions and were allowed more time for tax-deferred growth. The SECURE Act eliminated this type of “stretch IRA” distribution.*
Now, most non-spouse beneficiaries must drain inherited IRAs within 10 years. This could mean missing out on years of tax-deferred growth, plus a potentially higher tax burden for those who inherit large accounts. There are some exceptions – spouses, disabled individuals, minor children of the deceased, and those less than 10 years younger than the original account owner – who do not have to drain the account within 10 years.
Recently, the IRS released guidance on inherited IRA distribution. Beneficiaries will have to take a little bit out each year starting the year after the date of death. And, then beneficiaries have to take the remaining balance the 10th year.
The end of the stretch IRA could mean you need to revisit your estate plan – or create a new one that takes these factors into account. Don’t wait around and see what happens or think there’s nothing you can do to minimize your taxes – there are long-term and year-to-year tax planning strategies that we may be able to help you with.
*Note: If somebody died before January 1, 2020, their beneficiaries can still utilize the “stretch IRA” rule.
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Disclosure:
Investment advice is offered through APO Financial Services, LLC (“APO”) 10155 Westmoor Drive, Suite 175, Westminster, Colorado 80021-2627. APO Financial Services is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration with the SEC as an investment adviser should not be construed to imply that the SEC has approved or endorsed qualifications or the services Eric Scott Financial and/or APO Financial Services offers, or that its personnel possess a particular level of skill, expertise or training. Additional information pertaining to APO’s registration status, its business operations, services an fees, and its current written disclosure statement is available on the SECs Investment Adviser public website at https://apofinancial.com/disclosure/.
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