SECURE Act has Major Implications for Inherited & Traditional IRAs

President Trump signed the SECURE Act into law earlier this week as part of the government’s new spending bill and experts agree that this will influence most retirement savers in one way or another.

Recipients of individual retirement accounts may not actually see their inheritances for more than a decade due to the recently passed Secure Act, and when they do receive their funds, it’s quite likely that they may be heavily taxed on it.

This new retirement bill was signed into law just a few days before Christmas, which now means that beneficiaries of inherited IRAs will need to draw on these funds within 10 years — well that is, if they can access it at all within that time frame.

This law extends small business owners some added tax incentives to establish automatic enrollments for employee retirement plans and can also allow businesses to connect several plans collectively. A company can now also group themselves together with another business to offer their retirement accounts. Perhaps the most important provision of the bill was the move to remove the maximum age cap for traditional IRA contributions.

Up until now, non-spousal beneficiaries could opt to only take the required minimum distributions over their life expectancy, instead of taking all their money within the first five years. Required minimum distributions are determined by considerations such as a beneficiary’s age, account balance and life expectancy. This kind of tax-advantaged possibility will be going away with the introduction of the Secure Act, which only allows a single option: you have 10 years to deplete the funds in the account.

Beyond the 10th year, you will need to remove any money remaining and close the account, despite any possible tax related consequences.

This situation can be particularly dangerous for individuals who inherit an IRA through a trust. The account holders may have created a loved one’s inheritance money via a “conduit” or “pass through” trust, however, requires that the beneficiary would only receive the required minimum distribution just once per year and no more.

A trust such as this will protect a beneficiary from removing too much and wasting their money, and the initial owners of the IRA may see a trust as even more useful if the beneficiary is a young adult or has trouble managing money.

Under the Secure Act, there are no required minimum distributions for inherited IRAs (known as a “stretch IRA”). With this new law, a beneficiary needs to make sure all the money in their account is transferred out within the 10-year time limit. These regulations also apply to inherited 401(k) accounts, irrespective of whether they are rolled into IRAs, just as Roth IRAs are.

The only technical mandatory minimum distribution would be after the 10th year, which will be the remaining balance. When it comes to an inherited IRA through a trust, that would be the entire amount, with no opportunity to take your money out during this 10-year period.

What the SECURE Act Means for Taxes

There will be no tax breaks for taking funds out of traditional IRAs, and the same will apply to inherited IRAs. That means payments will be taxed at the beneficiary’s income tax bracket. This “drain-in-10” rule can result in a large tax bill for a beneficiary, especially if that person is in their 40s or 50s, which for many people are typically their highest earning years.

If you do have an IRA trust, you should consider speaking with an attorney to get it reevaluated and make sure the specific language within your trust documents will not affect you in a negative way.

The Congressional Research Service has stated that the removal of the stretch IRA itself has the capacity to create around $15.7 billion in tax revenue over the next decade. The Secure Act in its entirety is projected to create $16.4 billion over the next 10 years. Additional requirements of the new law involve allowing employers to offer annuities as options within a 401(k) as well as improving access to retirement plans for small business employees.

There are some exceptions to this new drain-in-10 rule. Surviving spouses can still withdraw only the required minimum over their life expectancy, as can minor children and persons with disabilities. Any child who has not yet reached majority age is only subject to the 10-year rule after they turn 18.

If you or someone you love has might be affected by these legal changes, we highly recommend that you reach out to our attorneys to ensure that their wishes will still be seen to after they pass away. Failing to do this may result in unnecessary taxed assets or remove or reduce access to that person’s money for years.

Read this Forbes article for additional information on how this new law might affect IRAs.

Contact our office at 509-328-2150 to schedule an appointment to meet with our skilled attorneys if you feel these laws could affect your family.