First, if you are inheriting an IRA, we offer our condolences. After all, rarely does this happen except when you have lost a loved one.
While learning how best to manage this new account might be the furthest thing from your mind right now, it is something to consider sooner rather than later. Not only will doing so have an impact on your economic future but ensuring your loved one’s life’s work produces the maximum possible benefit is also a powerful way to honor their legacy.
Below we’ve collected our top tips and advice to help you in achieving this goal.
Special Considerations for Surviving Spouses
If you are a surviving spouse, you are exempt from certain changes introduced by the Setting Every Community Up for Retirement Enhancement (SECURE) Act which came into effect in January 2020. In particular, while the act effectively ended stretch IRA planning for most beneficiaries, spouses are still permitted to take advantage of this strategy. This means your best play upon inheriting an IRA is, in most cases, to either put the account in your name or roll it over into your own, existing IRA. Both strategies allow you the option of receiving no more than the required minimum distributions (RMDs) from the account, thereby saving you from unnecessary income tax.
Strategies for Non-Spouse Beneficiaries
While the SECURE Act also exempts other classes of beneficiaries, including minor children, the chronically ill or disabled, and those who are within 10 years of age of the deceased, from certain consequences, none have it quite as easy as a surviving spouse. All of these folks, as well as any other class of beneficiary, need to set up a new, Inherited IRA and the way these accounts are now managed has changed with the new legislation.
Most beneficiaries have to withdraw all funds from an Inherited IRA within ten years, meaning that sooner or later, a portion of the inheritance will be lost to income tax. The exempt classes of beneficiaries mentioned above need not abide by this ten-year limit but must nonetheless withdraw all funds from the Inherited IRA over their lifetime. This is because, with the SECURE Act, Congress introduced other changes that gave folks greater tax flexibility but then needed to recoup costs somewhere. Putting an end to delayed IRA distributions was the solution.
The changes are inconvenient, no doubt, but even folks who have inherited an IRA since the introduction of the SECURE can still strategize to reduce taxes. The new legislation does away with yearly RMDs and so beneficiaries can withdraw more funds in low-income years and less in higher-income years. Also, if there is more than one beneficiary, each can use their own lower tax bracket over the ten years and thereby reduce the overall beneficiary tax burden.
While such strategies are powerful, those who have not yet inherited an IRA but are concerned about the changes made by the SECURE Act have even more effective tools for navigating the situation. A standalone retirement trust, for instance, allows a person to effectively replicate the stretch strategy when planning the passing down of their IRA. Likewise, a conduit trust provides an alternative workaround.
While addressing the details of these options is beyond the present piece, an experienced estate planning attorney can tell you all you need to know about ensuring an inheritance provides the maximum possible benefit to that which matters most: family and loved ones.