If you have an IRA that your loved ones will inherit, you will need to speak with an inheritance lawyer about how you can take extra steps in light of the new rules put in place by the SECURE Act. Otherwise, your beneficiaries will be more likely to end up with a larger tax bill afterward.
When a Problem Might Arise
If you are taking the Required Minimum Distributions, also known as RMDs, you have what is known as a "stretch IRA." Then, the beneficiary will need to continue to take RMDs for a year. The RMDs can be stretched out over the beneficiary's life expectancy. Prior to the passage of the SECURE Act in 2020, this was the best option for tax purposes.
Now, the RMDs are no longer necessary and the IRA account balance must be withdrawn within 10 years if the beneficiary is not a surviving spouse, a minor child, someone who is not ten years younger than the original IRA account holder, an individual who is disabled, and a few other circumstances. You will need to speak with an inheritance attorney about whether the beneficiary will be exempt.
Inherited Government-Sponsored Retirement Plans
The rules are somewhat different for a government-sponsored retirement plan and beneficiaries will not fall under this rule until 2022. Many US states have implemented programs that automatically enroll workers in government-sponsored IRAs.
Certain Annuity Contracts
Depending on the type of annuity contract you have, the beneficiary might be able to stretch the IRA out over their entire life. However, you should always talk about this with an inheritance attorney.
There are several strategies that beneficiaries use to avoid a penalty. Some beneficiaries make withdraws gradually and stretch them out over the course of a ten-year period. Some beneficiaries wait until 10 years have passed and quickly withdraw from the IRA account. There are also beneficiaries who withdraw in an irregular manner.
How you invest in your IRA can affect how much the tax bill will ultimately be. Bonds, CDs, and various fixed-income vehicles are more conservative and can allow you to invest in tax-deferred ways.
If the beneficiary expects there to be a significant change in their tax status in the coming years, it might be a good idea to contact an inheritance attorney. While the beneficiary will receive income from other sources such as Social Security, their taxable income will increase.Share