Estate planning isn’t fun, but it is necessary if you want to make sure that your family is taken care of and your property is disbursed the way you want it to after you’ve died. Furthermore, estate planning is not a one-and-done thing; you have to stay on top of regulations and developments to make sure your plan is still optimized. Starting in 2022, there’s a new government rule — part of the SECURE Act passed in 2019 — that may impact estate plans going forward, especially for the people who are inheriting property.
If you need help navigating these new rules or with estate planning more generally, consider getting help through SmartAsset’s free financial advisor matching service.
SECURE Act Basics
The SECURE Act — formally known as the Setting Every Community Up for Retirement Enhancement Act — was signed into law by former President Trump in 2019. It was designed to enhance retirement options for employees and make things easier for employers offering retirement plans.
There were many changes, including moving the age at which retirement savers are subject to required minimum distributions (RMDs) from age 70.5 to 72. That said, there are some changes — including one new interpretation of the law explained below — that change the way estates work and require both estate planners and potential estate recipients to change the way they think about their legacies.
New Interpretation Regarding Inherited IRAs
The new interpretation currently making noise in the press is regarding inherited individual retirement accounts (IRAs).
Essentially, here is how it works: prior to the SECURE Act, a young person who inherited an IRA had to take money out in required minimum distributions based on his or her own age. This created a so-called “stretch IRA,” where someone could keep money in an IRA for a very long time, allowing it to continue to grow over decades.
The SECURE Act ended stretch IRAs. Now, all money must be taken out of an inherited IRA within 10 years after the person who created the account dies. This could be taken out all at once as a lump sum (possibly to be invested elsewhere where RMDs won’t apply). It could also be taken out 10% each year, or in any other combination of withdrawals.
Now, though, the IRS is interpreting the SECURE Act to add another wrinkle to this issue. If the person you inherit the IRA from dies before turning 72 — the age at which point RMDs begin for IRA savers — the 10-year rule is exactly the same as it has been. If the person had already turned 72 and started taking RMDs, though, things are different.
Essentially, if RMDs had begun, you’re still required to take the yearly withdrawal as though the person you inherited it from was still alive — but you also have to take out all of the money at the end of the 10th year.
What the IRS Interpretation of the SECURE Act Changes
For estate planners, this means that you can’t push back the tax bill for a full 10 years for your children or grandchildren if you live past 72. The ten-year rule already limited the ability of an estate plan to do this, and the new interpretation does so even more.
One way around this is to instead use a Roth IRA. With a Roth IRA, the money has already been taxed and thus there are no RMDs. You can pass the IRA on to anyone you want and they can do what they want with it.
The Bottom Line
A recent IRS interpretation of the SECURE Act of 2019 has changed the way inherited IRAs work. If the person who dies was already 72, RMDs will now apply to an inherited IRA for ten years — and at the end ten years, all the money has to be out of the account.
Estate Planning Tips
- For help with passing down IRAs and any other estate planning issues, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Another option for estate planning is to form a living trust. A financial advisor can help you form one of those too.
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