SECURE ACT says Goodbye, to the “stretch” IRA
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) significantly changed the rules for IRAs, and defined contribution plans (such as 401(k) and profit-sharing plans). Consult with your estate attorney and tax professional about how the SECURE Act might affect you. Talk to us at Stonehouse about creative solutions available to you to deal with these and other provisions of the SECURE Act, so that you can still accomplish your legacy goals.
Goodbye “stretch” IRA !
This is one of the most significant estate planning changes of the SECURE Act. For account owners who die after Dec. 31, 2019, beneficiaries may no longer spread or “stretch” IRA distributions over their lifetimes. Instead, IRAs (Roth included), must be distributed by Dec. 31 of the 10th year following the account holder’s death. Subject to new limitations, there are exceptions to the 10-year force out:
- Surviving spouses generally have the same options as before (spousal rollover, etc.)
- Beneficiaries who are less than 10 years younger than the IRA owner (for example, a sibling beneficiary) may continue to a use a lifetime distribution method.
- Disabled or chronically ill beneficiaries may take distributions based on life expectancy.
- Minor children (but not grandchildren) may delay the 10-year period until reaching the age of majority (varies by state).
During the 10-year period, there is no required minimum distribution (RMD). For example, a beneficiary could leave the entire amount in the inherited account until the end of the 10th year. The beneficiary would then take a lump sum distribution of the entire account. Alternatively, a beneficiary could spread distributions evenly over 10 years – or any combination as long at the 10-year deadline is satisfied.
Income tax impact
The 10-year force out is included in the revenue section of the Act. The message is clear: The force out is intended to generate revenue for the federal government more quickly (10 years at most). The compressed income could push beneficiaries into higher tax brackets creating a tax “double whammy” (compressed income taxed at a higher marginal rate).
IRA owners and beneficiaries should work closely with tax advisors to determine the distribution pattern that makes the most sense. In some cases, a 10-year distribution pattern to prevent bracket creep may be advantageous. In others, a lump sum distribution may be appropriate (for example, taxpayers with significant tax deductions).
Call me at Stonehouse, for more information about the SECURE Act. I will help you identify issues and strategies to address them, so we can decide with your estate planning attorney and tax professional what strategies you should be considering.