Secure Act, Part 4 – Stretch IRAs

April 28, 2020
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One of the disappointments to come out of the Secure Act was the major overhaul to how IRAs are inherited by non-spouse beneficiaries. Prior to the new law, children, grandchildren, and others could inherit IRAs and stretch IRA distributions out over many years, allowing for a long period of tax deferred growth. Under the new law, most non-spouse beneficiaries have to distribute the entire account balance within 10 years of inheriting it.


Pre Secure-Act Example – Bill, who is 40 years old, inherits a $750,000 IRA from his father. He is only required to take out a small amount each year based on his life expectancy.

Post Secure-Act Example – Bill, who is 40 years old, inherits a $750,000 IRA from his father. He does not need to take any distributions until the 10th year but the entire account must be emptied by then.


If Bill does not need the income, you can see how this would result in a heavy tax burden. Assuming he takes 1/10 of the account each year and else is equal, he will have $75,000/year added to his income.


One area to review is whether you have a trust as a beneficiary of an IRA. In years past it was not uncommon to set up trusts and have children only be able to take the required minimum distribution each year. If this is the case, there is no required minimum distribution for years 1-9, possibly resulting in the entire account balance being distributed in 1 year, likely increasing the effect tax rate for beneficiaries. In the example above, that could be $750,000 in one year added to income! If this is the case for you, you should contact your estate attorney to review your beneficiaries.


Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.