Inherited IRAs: Strategies for Owners and Beneficiaries

Prior to the passage of the SECURE Act in 2019, IRA beneficiaries could spread Required Minimum Distributions (RMDs) for inherited IRAs over their lifetime – instead of the lifetime of the original owner – which which resulted in a “stretched” distribution period over a long time horizon, with smaller distributions (and lower tax payments) everywhere.

The “Stretch IRA” provision helped families minimize tax burdens, but was eliminated for most non-spouse beneficiaries with the passage of the SECURE Act.

For IRA owners who died on or after January 1, 2020, a “10-year rule” applies to most non-spouse beneficiaries of IRAs. This means that the beneficiary can receive distributions of any amount at any time as long as all assets are withdrawn no later than December 31 of the year containing the 10th anniversary of the owner’s death. * This rule applies to both Traditional IRA and Roth IRA assets.

The IRS’ proposed regulations, which interpret the SECURE Act of 2019, further clarify the 10-year rule to require annual distributions during the 10-year period and a full distribution at the end of the 10-year period if the owner of the IRAs died on or after their start date (RBD).** However, these annual distributions would not apply to beneficiaries of Roth IRAs who are subject to the 10-year rule since the assets of the Roth IRA are not subject to RMDs for life.

The Chief Investment Office (CIO) is looking at some of the ways you can manage the tax burden you or your beneficiaries will face.

Strategies for IRA Owners

Decide which assets you want to bequeath and to whom.

As discussed in the section “Legacy strategy: what do you plan to give and to whom?” » Tax and liquidity considerations are critical when developing a strategy to effectively transfer wealth between generations. Your IRA assets can be a valuable asset to pass on to future generations, even though the Stretch IRA strategy has largely been phased out, but in some cases you may be better off spending your IRA assets over your lifetime, leaving other assets for inheritance instead.

Some of the strategies we discuss in Beyond RMDs: 3 Strategies to Improve Your After-Tax Wealth PotentialRoth conversions, life insurance trusts and qualified charitable distributions can also help you get the most out of your retirement assets.

Leave your traditional IRA assets to multiple beneficiaries.

By planning to distribute your traditional IRA assets among many beneficiaries, some of your heirs may benefit from a lower marginal tax rate, increasing the after-tax wealth you can pass on to future generations. You may want to leave more of your Roth IRA assets with higher income earners and more traditional IRA assets with younger, lower income family members.†

Divide the IRA inheritance into two parts.

If you’re married, you can leave some of your traditional IRA assets directly to future generations and the rest to your spouse. Then your spouse can leave the rest of the Traditional IRA assets to future generations upon their death. This strategy can allow your non-spouse beneficiaries to benefit from two separate 10-year IRA distribution windows. Especially if your spouse outlives you for several years, this added flexibility could help your beneficiaries manage the tax impact of IRA distributions by spreading them out over multiple tax years.

Dedicate a portion of your IRA assets to philanthropy.

A charitable remainder trust (CRT) can be an attractive option if you have charitable goals and also want to give your family members a stream of income for life. A CRT is an irrevocable trust, outside of your taxable estate, that will pay distributions to your family (or other non-charitable individual beneficiaries) as taxable income, either over their lifetime or for a specified period. (up to a limit of 20 years) . At the end of the term of the trust (death of the ultimate beneficiary or at the end of the specified period), the remaining assets of the trust will be transferred to qualified charitable beneficiaries (public charities, private foundations or funds advised by donors). †† By spreading your distributions over many years, a CRT can help you improve the after-tax value of the IRA assets you leave to future generations of your family, while building assets for charity.‡

Click here to read the full report, Inherited IRAs: Strategies for Owners and Beneficiariesreleased August 4, 2022, which includes strategies for IRA beneficiaries.

Main contributors: Justin Waring, Ainsley Carbone

Content produced by the Chief Investment Office.

UBS Wealth Way is an approach integrating Liquidity. Longevity. Legacy. strategies that UBS Switzerland AG, UBS AG and UBS Financial Services Inc. and our advisors can use to help clients explore and pursue their wealth management needs and goals over different time periods. This approach is not a promise or guarantee that wealth, or financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment. Deadlines may vary. Strategies are subject to each client’s goals, objectives and relevance.

*There are some exceptions to the 10 year rule. For example, it does not apply to beneficiaries who, at the time of the IRA holder’s death, are disabled or chronically ill; it does not apply to minor children of the IRA holder (in which case the 10-year rule applies when they reach the age of majority); nor does it apply to those no more than 10 years younger than the account holder (e.g. slightly younger siblings).

**RBD: The required start date is April 1 of the year following the year the IRA owner turns 72.

†IF you plan to leave Traditional IRA assets to children, discuss your plan with your tax advisor; because yourxable retirementaccount distributions are counted asundeservedincome, they can be

subject to the so-called “child tax” rules, in which case the income could be taxed at the child’s parent’s marginal tax rate.

†† When a donor-advised fund is designated as a charitable beneficiary of a CRT, the funds may continue to grow tax-free even after the term of the CRT ends, and your heirs may have the ability to recommend changes regarding when and to whom the charity donations are ultimately made (grants must be made to public 501(c)(3) nonprofit organizations).

‡You may also want to partially fund a CRT with securities appreciated in your taxable accounts. Similar to a donor-advised fund, you can fund a CRT with appreciated stocks and then sell the asset (which most donors

advised funds) to reinvest in a more diversified investment strategy without accounting for capital gains tax. In this way, CRTs can help you preserve and grow the assets you use to fund your philanthropic and estate goals, as well as protect your heirs from potential changes in estate and tax laws. increased cost base.

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