There have been updates in the Secure Act in December 2019 which have made several significant changes to the U.S. retirement system. The latest update ends the rule of Stretch IRAs for non-spouse beneficiaries who will inherit a retirement account after 2019 ends. As per the most recent update, children inheriting their parent’s retirement account after 2019 will only have ten years to withdraw the deposited money ending the lifetime validity of the same.
In this blog, we will talk about various aspects of this update and try to acquaint you with all the highlights.
What has changed?
Previously, non-spouse beneficiaries could withdraw the funds from an IRA or defined contribution plan such as 401(k) and 403 9(b) by taking a required minimum distribution (RMD) over their lifetime.
The update ends the lifetime validity for taking this RMD from inherited retirement accounts by adult children. The same shall be effective if the decedent passes away after January 1st, 2020. In case, the retirement account holder passes on or after the date above, then the non-spouse beneficiary can only deplete the retirement account till the end of the 10th year of passing away of their parent or relative.
The four exceptions
#1: The 10-year clock will start ticking for minor beneficiaries only after they turn to the age of majority, i.e., 18 or 21 depending on the state.
#2: The respective update of the Secure Act will not apply if the beneficiaries are less than ten years of age of the decedent or if they are disabled.
#3: The beneficiaries mentioned in point 2 can withdraw the funds over their lifetime.
#4: The latest update will not be applicable to non-spouse beneficiaries who inherited a retirement account during or before 2019.
Other smart alternatives
If you don’t wish for your non-spouse beneficiary to be troubled by this update in the Secure Act, then you can consider leaving your savings to them by viewing any of these following: –
A Roth Conversion
By converting your funds from an old 401(k) account or a traditional IRA to a Roth IRA, you can extend the 10-year payout period but help your beneficiary realize the large sum of amount without having such an amount treated as ordinary taxable income.
Leave taxable assets in a revocable trust
This case is only valid for retirement accounts and not regular taxable investment accounts. In this case, you can bequeath your assets in a taxable brokerage account to your heir through a revocable trust called the living trust.
Review existing payout terms
Another smart move would be speaking with your planning attorney to understand how exactly the current changes impact your existing strategy. The impact could be different if the current strategy indicates the distribution of only RMDs.
Consider creating a charitable remainder trust
You may benefit by establishing a charitable remainder trust and naming it as the beneficiary to your retirement account. Please note, to make your non-spouse beneficiary the recipient of the charitable remainder trust as well. By doing this, you can have your beneficiary make the most of the funds of this trust for 20 years until the remaining assets get distributed to your selected charitable trust. This option will have its pros and cons, so consider and understand all relevant aspects thoroughly before taking this forward.
The Bottom Line
In conclusion, we suggest you do proper research and consult with your tax experts before making any modifications to your legacy or estate plan. The changes in the Secure Act changes many traditional practices, and it is advised to understand the act and its aspects clearly before taking any calls. Sure, the update might come as a shock to you, but you can always consider other alternatives to make your children’s future more secure. The changes are many; if you wish you understand the same in detail and explore all your available options for maximum benefit, then you may contact the MyTaxFiler team to get the help of our experts.