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What is the SECURE Act and How Does it Impact My IRAs?

What is the SECURE Act and How Does it Impact My IRAs? by Tom Sciacca{Read in 5 minutes}  Nowadays, people have all sorts of assets. It’s not uncommon for a person to own an apartment or real property, cash bank accounts, and/or intellectual property. But one of the most common assets that clients discuss with me when they sit down to write a Will is their retirement accounts. For more and more New Yorkers these days, the larger part of their accumulated wealth comes in the form of retirement savings.

Effective December 20th, 2019, the new Federal SECURE Act drastically reduces the choices that non-spouse beneficiaries have when inheriting a qualified retirement account such as an IRA or a 401(k). As discussed in a previous blog, a retirement account may be an asset that passes outside of an Estate and is paid directly to a named beneficiary. A person may name their spouse, their children, a charitable organization, or other important people in their life. Those beneficiaries will eventually need to withdraw the funds from the retirement account and pay income taxes on them — except for qualified charitable beneficiaries. 

With the passage of the SECURE Act, non-spouse beneficiaries no longer have the choice to receive their share of the IRA into what’s called an “inherited IRA” or a “stretch IRA,” which would allow the beneficiary to defer receiving the full benefit, and thus realizing the income tax liability, until a later date. When leaving money to younger beneficiaries such as children or grandchildren, such a beneficiary might be able to defer paying the full income tax liability for decades. No longer. 

Non-spouse beneficiaries are now required to withdraw the full amount of the IRA inheritance within 10 years of the date of death of the depositor. For example, if I name you as a beneficiary on my IRA, you are now faced with the choice of when you are going to receive a check, and thus deal with the payment of income taxes. You can elect to take it right away; you can elect to take it in a couple of payments; or you can wait until the last minute — the 10th anniversary of my death — and receive a lump sum benefit in the full amount of the account. Once you receive it, the plan administrator will issue an IRS Form 1099 to you, and you will need to report this as taxable income on your annual income tax return.

What are the key estate planning takeaways from this new law?

– Non-spouse IRA beneficiaries should consider discussing with their income tax preparers and advisors on the best time to take these distributions, and what that will mean for their annual tax liabilities going forward. 

– Anyone who owns a retirement account, whether they have a Will or not, should review their beneficiary designation forms and make sure that they are comfortable with the present allocations in light of this new law.

– Spouses are still able to elect to receive the money in a rollover IRA and defer paying the income taxes until they are in their seventies.

– There is an exception in the rule for minor beneficiaries, which means that the 10-year mandatory withdrawal period does not commence until that minor reaches the age of majority. For example, let’s say that I name my child, who is presently three years old, as the beneficiary on my retirement accounts and I die shortly thereafter. My child’s 10-year period does not begin until they reach the age of majority. That means they could take it out as early as when they turn age 18, or they can wait until their 28th birthday to make the withdrawal.

Like anything else, it’s important to stay on top of changes in the law concerning your estate plan and make sure that it is the best fit for you. Sometimes, it’s important to update your estate plan — and that time may provide a good opportunity to discuss your options with your attorney.

For more information on this topic, please contact me.