How the New SECURE Act May Affect Your Retirement, Estate Planning
A key part of estate planning is making provisions for your retirement accounts. For example, if you have an IRA, you need to name a beneficiary who will receive benefits upon your death. If you are married and name your spouse as beneficiary, they can effectively treat the inherited IRA as their own and continue making contributions into the account. But if you name someone else as beneficiary, say one of your children, this is not an option. Instead, a non-spouse beneficiary can only receive benefits from the existing IRA.
How “Stretch IRAs” Used to Work
Until the start of 2020, many people used an estate planning strategy commonly known as the “stretch IRA.” This does not refer to a particular type of IRA, such as a Roth IRA. Rather, a stretch IRA simply meant that distributions to non-spouse beneficiaries were made over a lengthy period of time. Because IRS regulations defined the “required minimum distribution” (RMD) an IRA must make each year based on the age of the beneficiaries, children or grandchildren of the original account owner could effectively receive a steady stream of income for their entire lifetime.
To give a simple illustration, let’s say you have a 30-year-old son. If you died and named your son beneficiary as part of a stretch IRA arrangement, the distributions could be stretched out until your child reached their average life expectancy of 83.3 years. In other words, the IRA could theoretically make annual payments to your son for the next 50-plus years. During this time, the assets in the IRA could continue to grow tax-free.
Why Stretch IRAs Are No Longer Allowed
Unfortunately, recent changes to federal tax law mean that stretch IRAs are not available for any retirement account owner who passes away after December 31, 2019. In late December 2019, a new federal law called the SECURE Act took effect. Formally known as the “Setting Every Community Up for Retirement Enhancement Act,” the SECURE Act made a number of changes to the tax laws governing IRAs.
Notably, the SECURE Act provides that when the original owner of a retirement account dies, the proceeds must be fully distributed to non-spouse beneficiaries within 10 years. This does not affect stretch IRAs in force prior to January 1, 2020. Nor does the SECURE Act alter the right of spouses who inherit IRAs to treat the accounts as their own. Congress also made certain exceptions for beneficiaries who are disabled or minor children.
But the bottom line is that for most individuals, now is a good time to re-evaluate how your IRAs and other retirement accounts fit into your overall estate plan. If you need advice from an experienced Forty Myers estate planning attorney, contact the Kuhn Law Firm, P.A., at 239-333-4529 today to schedule a free confidential consultation with a member of our team.