The ability to “stretch out” IRAs is a significant estate planning tool by allowing individuals who inherit IRAs to spread the Required Minimum Distribution (“RMD”) out over a significantly longer period, potentially saving significant tax dollars for the recipient. However, a new bill, named the “SECURE Act,” which has already passed the House with a bipartisan vote of 417-3, will significantly decrease this benefit if signed into law. So what is the SECURE Act, and how will it affect you?
NOTE: If RMDs are not taken, the IRS imposes a 50% penalty on the shortfall! So the general strategy is to stretch them out over the longest period of time and to make the RMDs as small as possible. You can always take out more than the RMD, just remember to take into account the tax implications of doing so.
Currently, when a spouse inherits an IRA and titles it into their name, the IRS treats the surviving spouse as if they had always owned the account; which means if the surviving spouse is under 70 ½ years old, they won’t have to take any RMDs until after they reach that age, and affords additional years of tax-deferred growth. Even if the surviving spouse is over 70 ½, they still can use the larger joint life expectancy divisor to calculate their RMD, which means smaller annual RMDs, and larger tax deferrals.
When someone other than a spouse inherits an IRA, the beneficiary must begin taking required minimum withdrawals over the beneficiary’s life expectancy. The first withdrawal must occur by December 31 of the year the decedent dies (if they were at least 70 ½ at death) or by December 31 of the year following the year the account owner dies (if the decedent was under 70 ½ at death). In subsequent years, additional minimum withdrawals must be taken by Dec. 31 of each year based on prior year-end values.
The SECURE Act, largely leaves what happens when a spouse or someone fewer than 10 years younger than the decedent inherits an IRA untouched; however, for anyone else, they no longer get the benefit of using their life expectancy to calculate the RMD. Therefore they must drain the account, and pay all resulting taxes, within 10 years after the decedent’s death. It’s not all bad news though. The SECURE Act does extend the RMD date from age 70 ½ to 72, which does provide some relief across the board.
Remember, the Senate has not yet passed their version of the act, which currently includes several taxpayer-friendly provisions such as not being applicable to inherited IRA balances of $400,000 per recipient. There will, of course, be multiple iterations before a final bill is voted on, but based on the bipartisan support the bill has been receiving, some version will likely be passed soon.
If you would like to find out more information on stretch IRA’s and how the SECURE Act affects you, please contact attorney and CPA Ron Zmuda at email@example.com or your Wood + Lamping attorney immediately.