Who is your beneficiary for your retirement accounts? Are you leaving them a ticking time bomb?
In this blog we will look at the SECURE Act and its recently passed updates. What do the new rules mean for you and your beneficiaries? What changes might you want to implement?
Before the SECURE Act, if you inherited an IRA, you could roll that into your inherited IRA or Beneficiary IRA. As an Inherited IRA you can withdraw monies from the account without early distribution penalties. Before 2020 and the SECURE Act, you were required to take minimum distributions (RMD). These distributions are based on your own age, typically younger than the prior owner. An Inherited IRA allowed you to S-T-R-E-T-C-H the payments out over your lifetime.
The SECURE Act changed that. The Stretch IRA virtually disappeared. Those classified as Eligible Designated Beneficiary can still stretch the IRA over their lifetime. This category is limited to spouses, disabled and chronically ill, minor children until age 21, and individuals within 10 years of the age of the IRA owner. With the exception of spouses, this is a small group of beneficiaries.
Another category of beneficiaries is Non-eligible Designated Beneficiary. This is probably the largest category. They are named specifically as beneficiaries. But they are not in the category making them eligible for the STRETCH IRA. They are subject to the new SECURE Act’s rules.
Inherited IRAs are now required to be paid out in 10 years. A beneficiary must empty the inherited IRA account by 12/31 of the 10th year following death. For example, Jack Abram dies in May of 2023. His daughter, Jesse, has until 12/31 of 2034 to have paid out all the monies from her Inherited IRA.
The age of the prior IRA owner will impact the distribution from the inherited IRA. If the deceased owner has started their RMDs, the beneficiary must continue taking RMDs years 1-9. The RMD calculation is based on the age of the beneficiary. You may take more money than the RMD amount but you can’t take less, and the account must be emptied by 12/31 of the 10th year following death.
If the deceased owner has not reached the age of Required Minimum Distributions, the beneficiary can wait the full 10 years to take any distribution. Yet the account still must be emptied by the end of the 10th year.
As the beneficiary, tax planning could be helpful in minimizing the taxes over the 10-year period.
An inherited Roth IRA also must be paid out by the end of the 10th year. However, as a Roth, earnings accumulate tax free and disbursements are tax free.
The SECURE Act 2.0 has delayed further when the RMD are required to begin. Before 2020, the Required minimum date was 70 ½. The SECURE Act changed the age to 72. SECURE Act 2.0 pushed the age to 73 beginning in 2023 and 75 in 2033.
Delaying the beginning RMD date may conserve your assets and reduce your current taxes.
However, you could be creating a tax explosion for yourself and/or for your beneficiary.
Delaying distributions allows your assets to grow tax deferred and accumulate a larger nest egg. When distributions begin, the required minimum distributions will also be larger, as they are based on the value of the account and your age.
Larger distributions can cause more of your social security benefits to be taxed. This can create a snowball affect increasing your Adjusted Gross Income (AGI). Your AGI determines the premium you pay for Medicare. For 2023 the AGI threshold for increased Medicare premiums is $97,000 for singles and $194,000 for married filing joint.
Retirement distributions is like playing a game of chess. For tax purposes, you need to be playing the long game. It’s about what taxes you are paying today and what you could be paying in 10, and 20 years from now.
In your estate planning, what ‘gift’ are you leaving your heirs? The SECURE Act has turned an inherited IRA into a ticking tax bomb.
Our office is here to help defuse that tax bomb. The sooner you plan, the more options you have.
*Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research, Inc., a Registered Investment Advisor. Boise Retirement Coach, and Cambridge are not affiliated. Cambridge does not offer tax or legal advice.