Why am I just now writing about the SECURE Act of 2019? Because many families remain unaware of an estate-planning pitfall it created by taking away the “stretch IRA.” This means, other than spouses, many heirs can no longer shelter an inherited IRA from income taxes for more than 10 years. And there’s a 50% TAX PENALTY if an inherited IRA isn’t closed out within 10 years of a decedent’s passing.
Have I got your attention?
Again, if your spouse inherits an IRA or any other retirement account from you, nothing has changed. Your spouse can still roll your retirement account into theirs, and treat it as their own, under the same rules as before. There also are some exceptions for minor children, beneficiaries who are less than 10 years younger than you, and special-need individuals.
Everyone else, including adult children, must withdraw, and pay applicable taxes on the entire account within 10 years of your death, or face that 50% penalty!
To avoid this ugly outcome, we recommend leaving a letter with your estate documents, informing heirs about the potential penalty. Remind them:
- Any traditional or Roth IRA or 401(k) must be gone within 10 years of your death … or else.
- Engage a tax specialist to plan when and how to wind down the account within the 10-year window.
- Because Roth withdrawals remain tax-free, Roth IRA assets may be best left untouched, to grow tax-free until the end of the 10-year period, and then taken all at once.
If you’ve not yet done so, consider gathering your financial planning team to ask relevant questions, such as:
- Might a Roth conversion help, or hurt, your children’s inheritance?
- Should you revisit your retirement account beneficiaries (especially if a trust is named)?
- If a trust is named, does its language let the executor properly wind down an inherited IRA to avoid the penalty?
Even though the SECURE Act is now more than one year old, I understand why all this may be breaking news to you. We’ve had just a few tiny things to deal with since it passed in December 2019, right? But you know about it now. So, consider this as good a time as any to act on it. Your heirs will thank you.