2020 has brought so many changes with it. Perhaps one most people are not thinking about is the implementation of the SECURE Act. See http://joneselderlaw.com/what-will-the-secure-act-do-to-your-ira/. With the elimination of the favorable Stretch IRA provisions, the Secure Act has placed added importance on this key date. September 30 in the year after an account holder dies is the deadline for establishing who the beneficiary of the qualified account will be and how the qualified account will be distributed. See https://www.barrons.com/articles/for-401-k-and-ira-holders-sept-30-is-key-deadline-for-beneficiary-designations-51600261201. Accordingly, September 30, 2020 is the final date to establish a qualified account beneficiary before the Secure Act begins to phase out the stretch IRA provisions for the majority of non-spouse beneficiaries.
Increased Income Tax under SECURE Act
As we have discussed in prior blogs, the SECURE Act is eliminating the stretch IRA strategy. Under the rules prior to the SECURE Act, a non-spouse beneficiary could take distributions from the inherited IRA over their life expectancy. For example, a 25-year-old who inherited a $1 million IRA from their grandmother would have been able to take distributions from that inherited IRA over their life expectancy or 58.2 years. https://www.forbes.com/sites/leonlabrecque/2020/01/30/legal-and-trust-issues-with-iras-under-the-new-secure-act-6-things-to-consider/#79a41a0029f9 That same beneficiary under the SECURE Act will be required to complete full distribution of the IRA within ten (10) years of inheriting it. This represents a rapid acceleration of tax recognition on the IRA and will result in a substantial increase in income taxes paid by the beneficiary. Planning for your IRA under the SECURE Act rules is going to take on increased importance.
Eligible Designated Beneficiaries
The first step in such planning is understanding who can still take advantage of the Stretch IRA provisions under the SECURE Act. For those who inherited an IRA from someone that passed in 2019 they are grandfathered and can still take advantage of the stretch IRA strategy. However, for those inheriting in 2020 and beyond the stretch IRA will be limited to “eligible designated beneficiaries.” The term eligible designated beneficiary means the surviving spouse, the minor child of the account holder, a disabled individual, a chronically ill individual or someone that is not more than ten (10) years younger than the account holder. See https://www.barrons.com/articles/for-401-k-and-ira-holders-sept-30-is-key-deadline-for-beneficiary-designations-51600261201. When the minor child reaches majority, they will no longer be allowed to use their life expectancy and would be subjected to a ten (10) year distribution from the date of reaching the age of majority.
Beware of the Non-Living Beneficiary
The SECURE Act makes it important by September 30, 2021 and beyond to make sure those named as a beneficiary are humans to be considered the designated beneficiary or eligible designated beneficiary. If a non-living beneficiary, such as a charity, is named along with living beneficiaries, it could result in the loss of the ten (10) year payout period or the stretch provision for all beneficiaries. See https://www.barrons.com/articles/for-401-k-and-ira-holders-sept-30-is-key-deadline-for-beneficiary-designations-51600261201. The consequences of a non-living beneficiary being incorrectly named could be the immediate taxation of the qualified account. For account owners with charitable intentions but not wanting to accelerate their beneficiary’s recognition of income, they may turn to charitable remainder trust. This approach allows them to create an income stream for a selected period of time, perhaps as long as twenty (20) years while still leaving something to charity.
Educating Yourself through a Vision Meeting
If you or your family are struggling with any Estate Planning or Probate concerns, make an appointment with the experienced St. Charles Estate Planning Attorneys at Jones Elder Law. That way, you can decide what happens to the assets you worked so hard to acquire. If we can help guide you, contact our St. Charles Estate Planning Law Firm at (636) 812-2575 and ask to schedule a call or virtual consultation, what we call a Vision Meeting http://joneselderlaw.com/vision-meeting/. For your safety and ours we have developed the Minimal Contact Planning process to be used while the Covid-19 virus remains a concern.
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