On December 20, 2019, Congress passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act. Before the change, an IRA owner had to begin taking their Required Minimum Distributions (RMD) at age 70½. That age has now changed to 72. That is good news if you don’t really need the distributions and are forced to take and pay income tax on them.
But there is another change that may cause you to rethink how you transfer your remaining IRA assets at the end of your life.
Before the change, if you named a non-spouse beneficiary to inherit your IRA, your beneficiary could take the entire amount as a lump-sum and immediately pay income tax on all of it, or they could choose to ‘stretch’ the distributions over their lifetime, paying income tax only on amounts that are withdrawn, leaving the rest of the assets in the IRA to continue to grow on a tax-deferred basis. The younger the beneficiary, the longer the life expectancy. The longer the life expectancy, the smaller the annual required distributions and the greater potential for deferring income taxes and growing the retirement account.
The SECURE Act changes that stretch option for IRAs and qualified plans like 401(k)s. Now, if your non-spouse beneficiary chooses not to take their share as a lump-sum, they can only stretch it over a 10-year term. Suppose you leave your IRA to your 25-year-old grandson when you die. In the past he would have been able to stretch those distributions over his entire life expectancy now, he can only stretch it over 10 years resulting in a larger part of the account going to pay taxes instead of to your grandson.
There are some alternative planning options, which you can discuss with your financial advisors. Consider life insurance, converting to a Roth IRA, or having the IRA transfer to a Charitable Remainder Trust (CRT) that would pay your beneficiaries for a term of years or their lifetime, with the remainder to a charity of your choice. For more information about CRTs, talk with your financial advisor, or you call Karen Van De Putte, Director of Philanthropy at Suncoast Hospice Foundation at (727) 523-3422.