Christopher Ingram explains how the SECURE (Setting Every Community Up for Retirement Enhancement) Act impacts you in regards to your Inherited IRA. Discover what the SECURE Act does, how it affects you, and what’s changed after it was put into effect.

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The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement Act, was signed into law by President Trump on December 20, 2019. It represents the most significant changes to retirement legislation in almost two decades, and it affects virtually every American worker and retiree in some way. However, one of the most significant impacts of the SECURE Act is on inherited individual retirement accounts (IRAs).

Under the previous rules, non-spouse beneficiaries of inherited IRAs had the option of taking annual required minimum distributions (RMDs) over their lifetimes, which allowed them to stretch out the tax-deferred growth of the inherited IRA for decades. This strategy was widely used by investors who wanted to transfer wealth to their heirs and minimize the tax impact.

However, the SECURE Act has eliminated the stretch IRA for most non-spouse beneficiaries of inherited IRAs. Under the new rules, most beneficiaries will be required to distribute the entire IRA balance within ten years of the original owner’s death.

There are a few exceptions to this new rule, however. The ten-year rule does not apply to surviving spouses, minor children, disabled individuals, and individuals who are not more than ten years younger than the original owner. These beneficiaries can still take RMDs over their lifetimes.

The loss of the stretch IRA can have significant tax implications for beneficiaries. Because the entire IRA balance must be distributed within ten years, beneficiaries may see a significant increase in their taxable income during that time. This could push them into a higher tax bracket and increase their tax liability.

The SECURE Act also affects estate planning. Many investors used inherited IRAs as a way to pass wealth to future generations with minimal tax consequences. The elimination of the stretch IRA means that estate planning strategies will need to be reevaluated to minimize the tax impact.

On a positive note, the SECURE Act removes the age limit for traditional IRA contributions. Under the previous rules, individuals could not contribute to a traditional IRA past age 70 ½. Now, individuals of any age can contribute to a traditional IRA as long as they have earned income.

In conclusion, the SECURE Act has significant implications for inherited IRAs and estate planning strategies. It’s essential for individuals to review their retirement and estate plans to ensure that they’re taking advantage of the new rules and minimizing the tax impact on their beneficiaries. Working with a financial professional can be helpful in navigating these changes and developing a personalized plan that meets their needs and goals.