It’s always important to review your estate plan when a new law comes into effect that could significantly impact the planning you’ve done. The Setting Every Community Up for Retirement Enhancement Act of 2019, called the “SECURE Act,” makes significant changes to how individual retirement accounts (IRAs) and certain retirement benefits must be treated after the owner’s death. The change getting the most attention is the elimination of the “stretch IRA” for most beneficiaries inheriting IRAs after 2019.
The stretch IRA allowed a non-spouse beneficiary to defer IRA distributions over the recipient’s lifetime. By using this stretch strategy, an IRA could be passed on from generation to generation while beneficiaries enjoyed deferring income tax (delaying paying taxes to some future period) and the tax-free growth of the balance.
Under the SECURE Act, beneficiaries of inherited IRAs will now need to withdraw that money within 10 years. After the 10th year, any money remaining in the account must be taken and the account closed. The rule also applies to inherited funds in a 401(k) account or other defined contribution plan. When that money is distributed, it will be taxed at the beneficiary’s income tax bracket, which can result in a large tax bill for the beneficiary.
Exceptions to the new “drain-in-10 rule”: Surviving spouses, minor children, and a disabled or chronically ill individual can still withdraw just the required minimum over their life expectancy. A child only becomes subject to the rule when they reach majority age (age 18 in Massachusetts).
The changes the SECURE Act brings are so significant that you should:
- Review your beneficiary designation forms and possibly restructure the planning for your IRA account if you don’t want your beneficiary to receive the total IRA value within the new 10-year period.
- Review and revise wills and trusts as needed. If conduit trusts were planned to take advantage of the stretch benefits, your estate plan may need to be amended to account for the SECURE Act.
The Forbes article “SECURE Act New IRA Rules: Change Your Estate Plan” provides some excellent insight into the SECURE Act.
This new law can severely impact your estate planning. While it can all sound pretty complicated, we can walk you through the review of your estate plan and clearly explain what changes could be made to make sure that your wishes are still met. Contact us at 617.299.6976 or mkarr@maheritagelawcenter.com, and we’ll make an estate plan review appointment for you.
