Heidi G. from Bellingham, WA asks: Hello from the Pacific Northwest, Mitch. I’m working on my estate plan and intend to leave my IRA to my adult children. I ‘think’ new rules are determining what my kids need to do once they inherit the IRA, but I have not been able to confirm. Do you have information on this?
Mitch’s Response:
Thanks for writing, Heidi. I do know what you’re referring to – it’s a new rule regarding IRAs that is part of the broader 2020 Setting Every Community Up for Retirement Enhancement (SECURE) Act. The new rules mark a big change to the way IRAs can be inherited, and as might be expected, they’re slightly confusing.
The basic premise of the new rule is as follows: when an adult beneficiary (child, grandchild, other non-spouse) inherits an IRA, they have 10 years from the date of the IRA owner’s passing to withdraw all of the assets. Before the recent rule change, folks were confused about how those withdrawals needed to be made. Did you have to withdraw a certain amount each year? 10 equal installments? Etc.1
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The IRS clarified the rule in May, stating that beneficiaries who inherit IRAs could make the withdrawals in whatever manner they wished, as long as all of the assets were withdrawn – and taxed – within the 10-year period. For example, if an IRA owner passed away on January 15, 2020, the beneficiary has until January 15, 2030, to withdraw the assets. He or she could take equal installments each year, a massive withdrawal right away, half in year 5 and half in year 10, really any strategy as long as the 10-year rule is met.
Every beneficiary’s situation is different, of course. But in my view, it could make sense for the beneficiary to wait as long as possible to withdraw the assets, to take advantage of 10 years of tax-deferred growth. But the wildcard there is not knowing what the U.S. tax law – and the beneficiary’s tax situation – will be in 10 years. As the old saying goes, however, ‘never let the tax tail wag the investment dog.’
Overall, this new rule in the SECURE Act virtually puts an end to the “stretch IRA,” in requiring beneficiaries to withdraw IRA assets. There is one exception, however, though it does not apply to you based on your question. If a spouse, a minor child of the account owner but not a grandchild, a disabled person, a chronically ill person or someone not more than 10 years younger than the original IRA holder is the beneficiary, they can spread out withdrawals over their lifetime based on IRS tables. In other words, the stretch IRA still lives but only for specific categories of beneficiaries.
I’m glad to hear you’re working on your estate plan and encourage all readers to take time each year to revisit your will, living trust, and other estate planning documents. I also think it’s wise to have conversations with your family about estate matters, to ensure everyone is on the same page.
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