On May 23, 2019, the House of Representatives passed the SECURE Act. The SECURE Act fundamentally changes how retirement assets are treated both during the account owner’s lifetime, as well as at death.
The current rules allow for retirement assets to be “stretched” out over the lifetime of the beneficiary that inherits that retirement account. This can be a huge benefit to the beneficiaries of an inherited IRA because they essentially will be able to take their required minimum distributions out over their lifetime and continue to defer the income tax payment on those distributions.
The SECURE Act changes retirement accounts dramatically. Here are a few key provisions:
- Remove the prohibition on contributing to an IRA past 70 ½ years old
- Increase the age at which you must start taking distributions from 70 ½ to 72 years old
- Requiring beneficiaries of inherited plans to take all of the distributions from the account out within 10 years of the account owner’s death
This last major change is the one that is of most concern. Let’s take a look a practical example.
Let’s say we have an account owner who dies at age 72 with an IRA worth $500,000. They have a 42 year old child that inherits that account. In the first year after death, that beneficiary will need to withdraw just over $12,000 as their distribution and pay the income tax on that amount. Now, that account will continue to be invested and has the potential for future growth. Under the current scheme and the IRS tables the entire account balance will be drawn out over the next 40 years and distributed completely by age 83.
Now, under the new law the calculations are much simpler. That same $500,000 account will have to be withdrawn within 10 years. Assuming equal distributions and no growth, the same beneficiary will now have to take at least 50,000 out each year and pay income tax on that amount.
Now there is another piece of that puzzle, let’s say the beneficiary takes that 50,000 out and reinvests, now they are paying taxes on dividends and capital gains on that taxable money.
The bill has passed the house, and the Senate has a similar, yet different bill in front of it. We will keep a close eye on any developments to see what, if anything is ultimately signed into law. If you have any concerns reach out to your estate planning attorney and financial advisor to see how this may affect you.