If you have a substantial IRA or 401(k), your estate planning may be obsolete due to the new SECURE Act.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), signed into law on December 20, 2019, drastically changes the rules for inherited IRAs.
Prior to the SECURE Act, if you owned an IRA (or 401(k), etc.) at your death, then your beneficiaries could take required minimum distributions (RMDs) over their own life expectancy. This was commonly referred to as a Stretch IRA, and it was permitted for individual beneficiaries, as well as trusts meeting certain requirements. Indeed, many of my clients created Conduit Trusts precisely to take advantage of this opportunity for an additional lifetime of tax-deferred growth. The results were truly dramatic.
Unfortunately, under the new SECURE Act, in most circumstances an inherited IRA must be entirely distributed to the beneficiaries within ten years of the owner’s death. The problem is that distributions from the IRA are considered taxable income. Therefore, instead of paying taxes in small amounts over a lifetime, the beneficiary must pay taxes on the entire account within ten years. For a $1 million IRA, this would mean paying taxes on at least $100,000 of income every year for ten years.
Major Changes to Estate Planning with Retirement Accounts | Beverly, MA Patch