Recent legislation, known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, now requires that an inherited IRA be fully distributed within 10 years. This change does not apply to retirement accounts inherited by a surviving spouse. Your spouse may still take required minimum distributions (RMDs) based on their life expectancy. It does apply to transfers to most adult children and trusts. There are exceptions for minors or those who are disabled or have a chronic illness.
If you named a trust as a beneficiary of your IRA, consider reviewing your plan with your advisor. Some trusts, known as conduit trusts, were written to require that any distributions from an IRA to the trust would immediately be distributed (or flow through) to the trust beneficiaries. This was a tax-advantaged approach as the IRA distribution was not taxed within the trust, but rather at the beneficiary’s tax bracket, which in almost all cases would be lower. When RMDs could be taken over the trust beneficiary’s life, this was a desirable result. With this new distribution requirement, a trust beneficiary of a conduit trust may receive too much too soon and with a heavy tax burden.
While the 10-year rule is unavoidable, there are individualized strategies that may reduce the tax consequences while still spreading access to the funds over an extended period of time:
Although the law has changed, this does not necessarily mean that your estate plan needs modification. Depending on the size of your IRA, the result of the new law may be acceptable. If you have concerns regarding the change, this may be a good time to review your estate plan with your financial advisor and attorney.
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