Your Money: How the SECURE Act Dramatically Affects Your IRA / 401 (k) Beneficiaries Business
Why did I just write about the SECURE law of 2019? Because many families are unaware of an estate planning pitfall he created by removing the “Stretch IRA”. This means that other than spouses, many heirs can no longer protect an inherited IRA from income tax for more than 10 years. And there is a 50% TAX PENALTY if an inherited IRA is not closed within 10 years of the death of a deceased.
Did I get your attention?
Again, if your spouse inherits an IRA or other retirement account from you, nothing has changed. Your spouse can still transfer your retirement account to theirs and treat it as their own, under the same rules as before. There are also exceptions for minor children, beneficiaries who are less than 10 years younger than you and people with special needs.
Everyone, including adult children, must withdraw and pay applicable taxes on the entire account within 10 years of your death, or face that 50% penalty!
To avoid this bad outcome, we recommend that you leave a letter with your inheritance documents, informing the heirs of the potential penalty. Remind them:
- Any Traditional or Roth or 401 (k) IRA must be gone within 10 years of your death… or else.
- Hire a tax professional to plan when and how to liquidate the account within the 10-year window.
- Since Roth withdrawals remain tax-free, it is best to leave the Roth IRA assets untouched, grow tax-free until the end of the 10-year period, and then take them into account. just once.
If you haven’t already, consider assembling your financial planning team to ask relevant questions, such as:
- Could a Roth conversion help or harm your children’s legacy?
- Should you review the beneficiaries of your retirement account (especially if a trust is appointed)?
- If a trust is named, does its language allow the executor to properly liquidate an inherited IRA to avoid the penalty?
Even though the SECURE law is over a year old now, I understand why all of this may be news to you. We’ve only had a few small things to work out since it passed in December 2019, haven’t we? But you know it now. So, consider this time to be another moment to act. Your heirs will thank you.
To read my previous articles, please visit insights.alliantwealth.com and select the InsideNoVa library. Online: alliantwealth.com Email: [email protected]