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Charting Futures For More Than 30 Years

How the Secure Act changes the stretch IRA

As people plan for retirement, they usually consider not only their own comfort and financial security in their golden years, but also how to provide for their loved ones. Anyone who is involved in estate planning is aware not only of the huge tax changes in the Tax Cuts and Jobs Act of 2017, but also of more recent legislation that impacts the inheritance of retirement accounts.

The Secure Act of 2019 has changed the way non-spouse beneficiaries may access inherited IRA accounts, including a cap of ten years in which to access them. The implications of this legislation are impacting legacy planning for many people in Missouri, so it is important to examine options now as more changes are likely to come in the new administration.

Inheritance of IRAs

Before the Secure Act was passed, non-spouse beneficiaries, often the adult children of the deceased, could choose to withdraw funds from an IRA such as a 403(b) or 401(k) by taking required minimum distributions (RMDs) over the course of a lifetime. The IRS uniform lifetime table provided the calculation of the amount based on the current age of the beneficiary and their life expectancy.

Called a ‘stretch IRA’, this option is no longer allowed if the decedent passes away after January 1, 2020. The law requires that the account be depleted within ten years. This rule does not apply to:

  • minor beneficiaries, whose ten-year payout period begins when they become adults
  • if the beneficiary is less than ten years younger than the decedent
  • if the beneficiary is disabled

These changes do not impact the inheritances of non-spouse beneficiaries whose relative passed away prior to 2019, nor does it apply to spousal beneficiaries.

Alternative planning opportunities

Now may be a good time to consider different ways of gifting your estate, especially retirement accounts, to your loved ones. Some options for retirement account owners may include:

  • Roth conversion, in which distributions will be tax-free if left untouched for five years
  • Leaving taxable assets in a revocable trust
  • Consider a charitable remainder trust

It is important to review the existing trust payout terms to avoid taxes on a lump sum payout after ten years. For St. Louis County and Chesterfield residents, having an experienced estate planning attorney to discuss options can provide tremendous peace of mind.