The new SECURE Act was signed into law on December 20, 2019. For those individuals who die after December 31, 2019, the new SECURE Act will affect many aspects of your retirement plan (IRA’s, 401k’s, etc).
Prior to the SECURE Act, most beneficiaries of an inherited IRA could opt to receive distributions from the IRA over their expected lifetime. The beneficiary must pay income tax on distributions from an IRA. Therefore, this “stretch” over their lifetime enabled the beneficiary to defer the taxable income over their life expectancy.
However, the SECURE Act now requires the IRA distributions for most beneficiaries to be completed within ten years after the IRA owner’s death. The result is that the income taxes get paid on those funds much sooner (10 years rather than over a lifetime). In addition, the distributions will be much larger than if they were stretched over a lifetime thereby possibly causing a beneficiary to be taxed in a much higher tax bracket.
Certain beneficiaries are not subject to the 10-year distribution rule. For example, minor beneficiaries may receive their IRA distributions based on life expectancy until they reach the age of majority. Disabled or chronically ill beneficiaries may receive their IRA distributions based on their life expectancy. Spousal beneficiaries may “roll over” the IRA to their own IRA allowing the surviving spouse to defer minimum distributions until they reach age 72 and then calculate their distributions based on their life expectancy.
If you have charitable inclinations, it is important to note that qualified charitable beneficiaries will continue to avoid paying income tax on the distributions from retirement plan benefits. Considering the more egregious SECURE Act tax consequences resulting to individual beneficiaries, the charitable beneficiary becomes much more attractive. IRA owners can direct their lifetime required minimum distributions directly to a charity to avoid paying income taxes on those lifetime distributions. In addition, the IRA owner can name a qualified charity as the death-time beneficiary of the IRA and that charity will receive the corpus of the funds in the IRA without paying income taxes as an individual beneficiary would have to pay.
You should review your current retirement plan and beneficiaries to understand the significant changes resulting from the SECURE Act. If you have an IRA and are charitably inclined, now may be the time to implement that charitable plan with your IRA.
Ann E. Salek, Certified Elder Law Attorney (CELA), Critchfield, Critchfield & Johnston
Ann is certified by the Ohio State Bar Association as a Specialist in Estate Planning, Trust and Probate Law. She is committed to providing her clients with the highest levels of expertise and care. Ann received her undergraduate degree from Allegheny College and her law degree from the Cleveland Marshall College of Law in Cleveland, where she graduated cum laude and finished in the top 10 percent of her class. In addition to her estate planning, trust, and probate background, Salek has expertise in elder law and special needs planning. She lives in Medina with her husband and five children.
*Certified specialist by the OSBA in Estates, Trust, and Probate Law *Certified Elder Law Attorney by the OSBA and National Elder Law Foundation
Critchfield, Critchfield & Johnston is a law firm with deep roots in Northeast Ohio and a history that dates back to the Civil War era. Since that time, the firm has served as trusted legal advisors to thousands of successful businesses and individuals and set the standard for a climate of excellence, teamwork, and client service. While we work in small towns, we have a deep bench of experienced attorneys with all the talent, skill, and experience found in “big city” firms. We provide our clients with leading-edge advice as they prepare their businesses and lives for the future, guiding them through complicated issues of estate, trust, tax, and business succession planning.