The 2019 SECURE ACT and IRA Stretch

Before the SECURE ACT or 2019 a non-spouse beneficiary of an IRA account (Traditional or ROTH) could make withdraws from that account for their entire life. They were required to immediately start taking distributions but those required distributions were low enough that the account could last a lifetime. The result, a lifetime of tax free growth.

SECURE ACT 2019, everything changes. Starting for all IRA accounts inherited by non-spouses after January 1, 2020, the beneficiary only has ten years to fully withdraw the funds from an inherited IRA. (There is an exception for minors and children with disabilities.) There are no annual RMDs during this 10 year period. Instead, the entire inherited IRA account balance must be emptied by the end of the 10th year after death. In the year (or years) of the withdraw the entire withdraw will be taxed as income (Traditional IRA). Roth IRAs are not taxable to your beneficiary, so the cost of the SECURE Act to them is not the cost of the withdraw but the loss of the loss of the tax-free earnings on that inheritance.

The problem here is two-fold. First, income taxes, generally, inherited IRA accounts are received by non-spouses during their highest income earning years. Forcing that inheritor to add additional income, in the form of inherited IRA distributions, to their taxes in those years can result in very high tax brackets for that inheritor. Tax brackets that could have been completely avoided. Second, the loss of tax-free growth. Investments grow inside an IRA tax free, once withdrawn that growth is fully taxable. By forcing the money out of IRA accounts quickly the IRS accomplishes two things TAXES and TAXES. Taxes on the distribution from the account and taxes on the future growth of that money.

If your estate planning involves a significant amount of IRA moneys being transferred to a non-spouse beneficiary, please know there are planning options to minimize the impact of the 2019 SECURE ACT. Consider coming in for a review (remember, we never charge for a review). In this case what you do not know can hurt you (or your non-spouse future beneficiary). That hurt may be lots of unnecessary taxes.