The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.
We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our sixth of six installments on inherited IRAs.
I’m about to inherit an IRA. Will these changes mean I pay more taxes?
Before the SECURE Act was signed into law, non-spouse IRA beneficiaries were able to stretch RMDs over their lifetime with annual RMD calculations based on their life expectancy. However, the implementation of the SECURE Act requires non-spouse beneficiaries to distribute an inherited IRA within 10 years following the death of the original owner. Inherited IRAs left to minor children must also be fully distributed within 10 years of the beneficiary reaching the age of majority.
Distributing your inherited IRA balance over 10 years instead of over your lifetime will accelerate your receipt of income. If you inherit a large Traditional IRA, income from your inherited IRA could push you into a higher tax bracket and increase your tax rate. We can help you plan the best way to distribute income from your inherited IRA within 10 years relative to your income and tax situation each year to minimize additional taxes.
For example, an individual who is earning a gross income of $150k per year would fall in the 24% marginal tax bracket after claiming the standard deduction. However, adding annual $100k+ distributions from a $1.0 million inherited IRA balance that must be distributed over 10 years will push that person into the 35% tax bracket. If income fluctuates over that period, there may be opportunities to take additional distributions in lower income years to minimize overall taxes on the inherited IRA.
We can help you avoid running afoul of the new SECURE Act requirements by evaluating your income and taxes to develop the best strategy for adhering to the latest rules for your inherited IRA.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Second Installment: How to Optimize Your Accounts After the SECURE Act
Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act
Fifth Installment: The SECURE Act: Important Estate Planning Considerations
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
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Jeff joined Merriman with a different perspective than most, after working in hospitals and universities to find new treatments for challenges in healthcare and earning his graduate degree in clinical research. He wanted to do more to help families suffering from the financial impact of medical burdens on top and joined the Merriman team in 2018. His ability to enrich and support families is the most fulfilling part of his role as an advisor.
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