The Secure Act is changing the way people will inherit money – are you affected by the new rules?
The Secure Act, which was signed earlier this month, changes the way beneficiaries will receive money from legacy retirement accounts, but not everyone is threatened with a big tax hit.
The new rules state that beneficiaries of qualified retirement accounts, such as individual retirement accounts and 401 (k) plans, must withdraw all money from those accounts within 10 years, instead of exceeding their life expectancy. as was previously allowed. There are no minimum distributions required within this time frame, but the account balance must be zero after the 10th year.
Stretching withdrawals over the beneficiary’s life expectancy – the so-called extended IRA provision – meant paying less taxes, while the new rule threatens to increase tax bills, especially if the heir is in. his maximum earning years. The required minimum distribution calculations are based on many factors including the beneficiary’s age, life expectancy, and account balance.
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Nonetheless, original account holders and their beneficiaries may wish to discuss their current succession and withdrawal plans with financial professionals, such as an advisor, the institution that hosts the assets, or a company operating a trust. . Failure to act on these changes, if necessary, could leave some beneficiaries paying significantly more taxes – or being left out of their inheritance for a decade.
Here are some questions readers have asked about the new rule:
I have been withdrawing RMD from an Inherited IRA for a few years now. Will I be subject to the 10-year rule?
No. The new 10-year rule only applies to the accounts of benefactors who died in 2020 and beyond. Current beneficiaries of legacy IRAs and 401 (k) plans will still be allowed to withdraw the minimum distributions required on their life expectancy, said Michael Kitces, partner and director of wealth management for Pinnacle Advisory Group at Columbia, in the Maryland. the rule of the year will go into effect on January 1, 2020, meaning anyone who died before December 31, 2019 not to be affected.
Are there any exceptions to the rule?
The rule does not apply to beneficiary spouses, as well as disabled beneficiaries and those who are no more than 10 years younger than the account holder (such as a slightly younger sibling, for example) . Minor children are also exempt, but only until they reach the age of majority. After that, they will have 10 years to withdraw the assets from a legacy account.
Spouses, disabled beneficiaries and other persons covered by the exception will still be allowed to receive distributions during their life expectancy.
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How do I withdraw the money from this account under the new 10 year rule?
It depends entirely on the individual’s situation, but there are certain factors to consider. Withdrawals will be taxed at the beneficiary’s ordinary income tax rate, meaning a person in their best earning years will be taxed more heavily than a low-income person. Beneficiaries approaching their own retirement (in less than 10 years) may want to delay withdrawals from these legacy accounts under the 10-year rule until they have retired, so that the withdrawal does not occur. not add to their earned income, Kitces says.
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Can I transfer the inherited assets to another traditional IRA? Do I have any alternatives to keep the money in this Legacy IRA?
Non-spouses cannot transfer an inherited IRA from one account to another – they can only receive distributions from them, depending on the Tax service. (They may, however, consider a trustee-to-trustee transfer if the account receiving the rollover is opened in the name of the deceased owner of the IRA). Beneficiaries of 401 (k) plans can transfer the money into a “Legacy IRA”.
For many, the new 10-year rule dramatically decreases the odds of withdrawing assets in a tax-efficient manner (this provision alone is expected to generate around $ 15.7 billion in tax revenue over the next decade). But there are alternatives, said Steve Parrish, co-director of the Retirement Income Center at the American College of Financial Services in King of Prussia, Penn. One option is the purchase of life insurance by a benefactor.
Take for example a grandmother who wants to leave her adult grandson with an IRA with a balance of $ 100,000. Before the Secure Act was enacted, she might have wanted to leave it to him in its current state so that he could withdraw the assets during his life expectancy. But now that the law has changed, she could pay the premiums on a life insurance policy and name her grandson as the beneficiary, Parrish said. She will pay taxes on the premium, not the life insurance death benefit, and her grandson will receive the benefit tax-free. “A huge motivation for extending the payment of an IRA after death was the possibility of lowering taxes,” Parrish said. “Now that motivation has been drastically reduced.”