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Home » Uncategorized » The SECURE Act Has Made Significant Changes to IRA Rules

The SECURE Act Has Made Significant Changes to IRA Rules

January 6, 2020 by John Potter

At the end of 2019, Congress passed the SECURE Act making significant changes to the distribution rules for inherited IRAs; these apply to individuals who die in 2020 or later. Most inherited IRAs must be now distributed within ten years of the death of the IRA owner, though there are still exceptions for surviving spouses, minor children, and disabled beneficiaries. This blog post will talk about some of these SECURE Act changes. We also have client law updates in Matthews on January 23 and Huntersville on January 29 to discuss clients’ options to adjust to this new tax regime.

The End of “Stretch Distributions” for Most Beneficiaries

The old rule allowed a properly-named beneficiary to withdraw the IRA funds over his or her life expectancy after the death of the IRA owner. For example, if a parent left an IRA to a child who was expected to live another 40 years after the parent’s death, the child would have minimum required distributions allowing distributions over 40 years – the child would have to withdraw 1/40 in the first year after the parent’s death, 1/39 in the second year, and so on. The child could take the distributions faster than the minimum required distribution schedule, but the child would have to pay taxes on whatever amount was withdrawn from a traditional IRA so it generally made sense to stretch out the distributions and delay paying the taxes. Under the new rule (unless an exception applies), the child would have to withdraw the entire IRA within 10 years. There are no required minimum distributions until year 10 so the child could take out the IRA at any time during the 10 years, whether over a number of years or all at once. (Often, it will make sense to take the distributions in ten roughly equal amounts.)

This change in the distribution rules will require significant re-thinking of some trust planning where the beneficiary is not intended to receive a large inheritance over a short period. The change will also require some clients to re-think their use of traditional IRAs and their distribution plans because of the change in tax consequences.

Spousal Exceptions

As mentioned above, there are exceptions to the new rule. Two of them apply to surviving spouses. A surviving spouse who has reached age 59 ½ will normally want to make a spousal rollover so the IRA becomes the surviving spouse’s IRA; the new rule does not affect these spousal rollovers.

If a surviving spouse needs access to IRA funds and is under age 59 ½ (the age when you can take penalty-free withdrawals from your own IRA or a spousal rollover IRA), the spouse may want to take the IRA as an inherited IRA to permit distributions before 59 ½. In that case, the spouse would still have required minimum distributions like under the old rule and could stretch distributions based on his or her life expectancy. After the spouse’s death, though, the children or other named beneficiaries would only have 10 years to take distributions (even if the children are minors or disabled).

Minor Children

If a minor child of the IRA owner is named as beneficiary of the IRA, the minor child can take distributions based on life expectancy (the old rule) until the child reaches adulthood. Then the child has 10 years to take distributions. You don’t receive extra time for beneficiaries who are other people’s children (including grandchildren).

Disabled or Chronically-Ill

Beneficiaries who are disabled or chronically-ill according to the IRS are able to take distributions over their life expectancies (like the old rule) and certain trusts for their benefit can take distributions over their life expectancies as long as they meet new guidelines. The beneficiaries after the deaths of the disabled or chronically-ill beneficiaries have only 10 years to distribute the remaining balance of the IRA funds.

These are some of the more significant provisions of the SECURE Act, but there are more we will explore in the coming weeks. These provisions discussed above are from the Revenue portion of the bill, which means the purpose of these provisions is to bring in more tax revenues for the federal government. If you would like to talk about how to minimize the tax hit your family will receive, please set up an appointment. We can be reached at (704) 944-3245 in Charlotte, NC and Huntersville, NC, and at (606) 324-5516 in Ashland, KY and (859) 372-6655 in Florence, KY or on our contact us page.

A more technical analysis of the statute is available on the North Carolina Bar Association Elder Law Section’s blog.

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