Individual Retirement Accounts (IRAs) are widely used throughout the United States as a vehicle to save for retirement. A Traditional IRA allows the owner to deduct the amounts contributed to the IRA from his or her taxable income. This is, as you can imagine, a wonderful benefit to the owner. The assets are allowed to grow in an IRA without tax consequences, and only upon withdrawal of those amounts are they taxed to the owner.
What happens when the owner of an IRA dies though, does anyone need to pay the income taxes on those amounts?
When a designated beneficiary of an IRA receives the funds after the original owner dies, he or she must begin taking required minimum distributions from the account. Prior to 2020, the designated beneficiaries were allowed to use their own life expectancy to calculate the amount of that annual distribution. This was a great benefit to the beneficiary, especially if he or she were young because there were many years over which to withdraw the funds. By spreading out the withdrawals over more years, the income recognized in each year would be less and thus not have as much impact on the individual beneficiary’s income tax return.
This procedure all changed in 2020. Congress passed and the President signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) on December 20, 2019. The Act included language which directly updated the stretch provisions described previously. Now instead of allowing the beneficiary to take the distributions over their lifetime, the time period is shortened to a flat 10 years. There are some exceptions to the new rule, but they address very specific circumstances.
Tresp Law, APC makes it a point to discuss the implications of the SECURE Act with all of our Estate Planning clients to ensure they are aware of the complications that can arise by making a Revocable Trust the beneficiary and how that works with designated beneficiaries. Call for a consultation appointment today.
