Many New Yorkers devote a good portion of their lives building wealth and saving a portion of it in a specialized account for retirement. Without comprehensive planning, however, heirs inheriting their retirement plans may find themselves liable for paying unexpected taxes.
Congress recently passed the Setting Every Community Up for Retirement Enhancement Act, which changes the way some heirs may access funds from an inherited IRA. Effective January 1, 2020, the SECURE Act requires heirs inheriting an IRA to withdraw the account’s entire balance within 10 years. As reported by U.S. News & World Report, the Act exempts a spouse, minors and chronically ill or disabled heirs from the 10-year mandatory withdrawal requirement.
Generally, an IRA allows individuals to contribute to the plan during their working years and then withdraw funds during retirement. After passing away, a spouse, heir or another named beneficiary may then inherit the account with its remaining balance.
Prior to the SECURE Act, the account’s new owner could withdraw an IRA’s assets throughout his or her lifetime whether working or retired. “Stretching out” an IRA’s distributions over a beneficiary or heir’s life reduced income taxes because taking all of it at one time while still working could result in a hefty tax hit.
The SECURE Act’s new time frames
Because a non-exempt IRA inheritor now has only 10 years to withdraw all the funds from the account, IRAs held in a trust may no longer be subject to required minimum distributions. RMDs set-up in a “stretch IRA” plan no longer apply; inheritors must simply ensure the account empties in 10 years.
Another of the SECURE Act’s changes is that a retiree may wait until the age of 72 to begin taking distributions from his or her IRA. The prior age was 70 years and six months.
Estate planning with an IRA
As noted by Forbes magazine, the new laws may give cause to review an existing IRA or asset preservation strategy. Based on an estate plan’s structure, a testator may minimize taxes, avoid probate and make it easier to transfer assets to beneficiaries