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Until January 1, 2020, when an IRA owner died naming a non-spouse beneficiary, that beneficiary could take taxable distributions over the beneficiary’s life expectancy.
The Secure Act (Setting Every Community Up for Retirement Enhancement Act of 2019), made major changes to the distribution rule that affect Inherited IRAs.
The new rules require a full taxable payout from the IRA within 10 years after the death of the IRA owner.
There are a at least a couple of significant consequences that result from the SECURE Act:
(1) Generally, children inherit IRAs in their 50’s. Now, since these beneficiaries must pay tax on the entire amount of the Inherited IRA within 10 years, they will be paying tax on the Inherited IRA at higher rates since children will take these distributions in their high income-earning years.
(2) Many IRA owners have attempted to carefully take advantage of legal strategies and named a trust as the beneficiary of their IRA. The “see-through trust” often requires the trustee to distribute the required minimum distribution (RMD) to the child or grandchild of the previous IRA owner. Now, RMD has a different definition and there will be only one RMD for the beneficiary of an Inherited IRA – 10 years after the death of the original IRA owner.
Bottom line – check your traditional IRA beneficiary designations. If you named a trust as a beneficiary of your IRA, you should re-visit the terms of that trust in light of these new distribution rules, and, if appropriate, make changes.
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Estate Planning Attorney
www.RabalaisEstatePlanning.com
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The government is out to keep people generationally poor. The safest money people have is the money they pay the tax on up front and keep out of the way of government tax shelter rule changes, that come down the line decades later.
wouldn't it be better to spend down your IRA first before you spend down your investments?
You described my dilemma perfectly. I’m exactly 50 and basically (to put it bluntly) I’m fucked! Thank you for the video though. Great info nonetheless.
6:03 Here is the meat of his point and the big issue you need to consider. You're welcome.
13 minutes for 2 minute explanation, anyway no Roth even one time
Great video interpreting IRS regulation into plain English. Please stay on top of the Secure Act and IRA (BENE) or (Inherited). I am confused as there could be more clarification answering the question "Can you select the 10 year distribution if the death occurred in 2020? Are there any limitations?
Knowing I'll be getting something in future, I'm adding more to my Roth and will add heavily into 401k once I'm required to take distributions from inherited IRAs as it will up my income. Lowering my income as funding pre tax 401k. This video really helped me think about future retirement planning for me and my spouse…I'm needing to explore all ideas for named beneficiaries including IRAs like our trust for our retirement.
I am sorry for your loss…….
I inherited my non spouse IRA at 70. I'm at the peak of my income. This thing is hell.
This new law really teed me off!!!
Thank you again much needed info. Now I know what to tell my son.
What about second-generation non-spouse beneficiaries? Elderly Brother inherits large trad IRA from elderly brother. Inheriting elderly brother dies before the ten-year clock expires and may not have aggressively distributed funds from IRA. Inheriting son only has a balance of the original ten years to distribute the rest of the inherited IRA. Inheriting brother is in a low, retiree tax bracket. 2nd beneficiary, son/nephew is in a high tax bracket. Nephew gets whacked by taxes.
Brother, brother, and nephew need to synchronize up before the first brother passes. The first brother should shift the beneficiary share from brother to nephew. gradually. Without knowing one's own final date, I expect that he would use life expectancy. Nephew's share corresponds to mortality probability of inheriting brother. Fifty percent mortality at X date means 50% to nephew and so on.
While you want to take care of family, it's not wise to end up with a huge account and no time for the nephew to distribute it. With progressive tax rates and surcharges, substantial amounts of the money end up with the IRS. Better planning can minimize that loss. Even if the nephew had a full ten years, the IRS would get a lot. Still, it should not get a lot plus 1 dollar.
What a tax nightmare. Yikes
How about if a Trust is named beneficiary of the the inherited IRA and the Successor Trustee decides to close out the IRA and give it the Settlors main beneficiary, only child?
When my father died his IRA continued to be in his name as part of the revocable trust. Does that sound correct ?
I just received a notice that I am the beneficiary of my son's Sep-IRA. I am 74 years old. The company where the Sep IRA is held is telling me that I must open an IRA with their firm. I would prefer to have the IRA at the office where my own IRA and Sep Ira are held. They can't disclose the amount until I open an IRA with them. Does this sound correct?
Depending on the amount it makes sense to me to just cash out and pay the tax.
I have a mentally disabled brother who is in a trust with me where we have a Bank Trust as sole trustee and executor. Can my brother get the stretch distribution under his special needs trust ? He would still fall under the % allocation (like 50%). He also benefits because he earns $0 bc he never had a job.
The government is throwing money down rat holes and now they want to fund their drunken spending sprees with the sweat of the middle class. Tax 'em and make sure the cycle of poverty continues.
Great video! I have been wanting to transfer an Inherited IRA (cash) from a brokerage account to a Vanguard mutual fund. I spent 2 hours on phone yesterday with Vanguard opening a new "inherited IRA" account. The transfer request was sent by Vanguard to my brokerage account yesterday and which was immediately rejected because the decedent's name was not on the transfer request and the title did not match name on brokerage account (which includes decedent's name). In the last 24 hours I have spoken with several "reps" from Vanguard who insisted the transfer request was correctly titled. We had a 3-way call this morning with my brokerage account and Vanguard rep who explained once again that the decedent's name MUST be included on the transfer request and the reason(s) why. Yes we both had to give Vanguard rep tutorial on correctly titling of inherited IRA accounts. After speaking with 5 reps at Vanguard, 2 of which indicated they were familiar with the SECURE and/or CARES act regarding annual RMD distributions, I decided to cancel transfer and shut down my Vanguard account. Vanguard NEVER requested the date of death of the decedent which would alert them that the SECURE and/or CARES act does NOT apply to my funds since the date of death of decedent was BEFORE 12/2019. I was uncomfortable having inherited IRA funds with Vanguard as they would calculate my annual RMD incorrectly and deplete the account within 5 years due to the SECURE act which is exactly what I don't want to happen. I wanted the funds to GROW! Vanguard really needs to train their reps the correct way to open Inherited fund accounts and set up the correct annual RMD calculation which includes the date of death of the decedent. Big waste of time!
This is ridiculous change. We need easier and clearer rules that help retirees not crap like this. Already made adjustments in my Trust.
35% taxes in sale of property out of trust. CRT and family trust amended constantly.Complicated..Re do..Mom dad