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The Setting Every Community Up for Retirement Enhancement Act, more commonly known as the Secure Act, was signed into law on December 20, 2019, and came into effect on January 1, 2020. The Secure Act brought several changes to the rules governing Individual Retirement Accounts (IRAs), including inherited IRAs. Here are the newly inherited IRA changes from the Secure Act and what they mean for IRA owners and beneficiaries.

Elimination of the Stretch IRA

The biggest change to the inherited IRA rules is the elimination of the stretch IRA. Before the Secure Act, non-spouse beneficiaries of inherited IRAs could take withdrawals from the account over their lifetime, allowing the assets to continue to grow tax-free over decades. This strategy was known as the stretch IRA.

Under the new rules, non-spouse beneficiaries must withdraw the entire inherited IRA balance within ten years of the account owner’s death, regardless of their age or life expectancy. This means that the money must be withdrawn much faster, potentially causing beneficiaries to face higher tax bills.

Exceptions to the Ten-Year Rule

There are exceptions to the ten-year rule for certain beneficiaries. Surviving spouses, minor children, disabled individuals, and chronically ill individuals can still withdraw the inherited IRA over their lifetime. However, once they no longer meet the exemption criteria, the ten-year rule applies.

Impact on Estate Planning

The new rules surrounding inherited IRAs will have a significant impact on estate planning. If an IRA owner has named a trust as the beneficiary of their IRA, the trustee will need to ensure that they adhere to the new rules regarding distributions. A conduit trust, which requires that the Required Minimum Distribution (RMD) be paid directly to the trust beneficiary, may no longer be advisable under the new law.

IRA owners may want to review their beneficiary designations and consider the impact of the new rules on their overall estate plan. For example, an IRA owner may choose to leave retirement assets to a charitable remainder trust or a charitable lead trust to minimize the tax consequences for their heirs.

The Bottom Line

The changes to the rules governing inherited IRAs from the Secure Act mean that beneficiaries will need to withdraw the entire IRA balance within ten years. This change will reduce the ability to stretch the IRA over many years and could lead to higher taxes for beneficiaries. IRA owners will need to review their beneficiary designations and estate plans to ensure they meet their goals while minimizing the tax consequences for their heirs.