In this episode, Financial Advisors Rose Price, CFP(r) AIF(r) and Chris Mellone, CFA CFP(r) AIF(r) discuss the implications around the Inherited IRA 10-year distribution rule brought on by the SECURE ACT, as well as strategies to consider. Want to learn more? Schedule a meeting with us at www.vlpfa.com or call at 703-356-4360.

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As of 2020, the 10-year rule came into effect and it has become an important aspect for advisors to discuss with clients who have inherited IRA accounts. Under the new rule, non-spouse beneficiaries of an IRA account must withdraw all assets within 10 years of inheriting the IRA account. This rule supersedes the previous law which allowed beneficiaries to stretch out withdrawals and stretch out taxes over their lifespan.

So, what should advisors do about the inherited IRA 10-year rule? Here are some quick takes for advisors:

1. Discuss With Clients – As soon as possible, take the time to discuss the 10-year rule with clients. Clients might have already heard about it, but it’s important to confirm if they understand the implications. The 10-year rule means that beneficiaries who inherit an IRA account must now withdraw all assets within 10 years of inheriting that account. This can result in a significant tax liability.

2. Evaluate Potential Tax Consequences – An advisor should evaluate the client’s overall financial situation and how inheriting an IRA will affect their current tax obligations. A financial advisor can help a client understand the potential tax consequences of inheriting an IRA account and explore strategies to minimize the tax liability.

3. Review Estate Plans – In light of the 10-year rule, advisors should recommend reviewing and updating estate plans to ensure that IRA beneficiary designations are still aligned with the client’s wishes and goals. Clients may also want to consider adding trusts as beneficiaries in order to maintain control over how the assets are distributed.

4. Rethink IRA Conversions- With the implementation of the 10-year rule, clients who are considering a Roth conversions should look into the effect of doing so on potential beneficiaries and create a new plan.

5. Provide Options for Beneficiaries- IRA account owners have the option to name multiple primary beneficiaries in order to spread out the tax liability. This way clients can spread the 10-year withdrawal rule across family members, thus reducing each beneficiary’s potential tax liability.

Advisors should recognize the significance of the 10-year rule and communicate effectively to clients in order to make a well-informed decision about their inherited IRA account. Being transparent about the 10-year rule and its implications will help ensure your clients are able to make strategic financial decisions that align with their overall goals.