Did you know that bequeathing Individual Retirement Accounts (IRAs) is becoming more prevalent? This may be because the Baby Boomer generation is the first generation that has created retirement wealth in IRAs.
The proposed SECURE Act, however, may require the IRA owner to make some changes to his or her IRA estate plan.
This legislation has not yet been passed by the Senate. Nevertheless, strong bipartisan support in the U.S. House of Representatives, where it passed, suggests this legislation may also succeed in the Senate.
The SECURE Act would upset the status quo for financial planning with IRAs by changing the rules that apply to inherited retirement accounts.
Presently, a non-spouse beneficiary that inherits a retirement account is not required to make a withdrawal until they reach the age of 70 1/2, therefore stretching the tax shield of the IRA over decades.
The SECURE Act will require that when the account holder passes away, the non-spouse beneficiary must withdraw all of the IRA proceeds within 10 years of the original account owner’s death. In other words, the person who inherits the account would be required to add these withdrawals to their taxable income over the next decade, consequently putting them at risk of a higher tax rate and preventing them from saving this capital toward their own retirement.
Those beneficiaries inheriting IRAs will not be able to defer the distribution of the IRA proceeds until death. Instead, the beneficiary will have to take that money out in 10 years when he or she is at the highest income earnings. By requiring people to draw down retirement accounts over 10 years, rather than their lifetime, it is detrimental to their long-term financial plans.
Today, you cannot contribute to a traditional IRA when you are over 70 1/2 years old. The SECURE Act would remove that cap, permitting you to contribute at any age. This change is intended to reflect the changing nature of retirement in the U.S. as people live and work longer than in prior decades.
We know that this article may raise more questions than it answers for you. We encourage you not to wait to learn more about not only this component within your estate planning, but your estate planning overall. Together, we can create a legacy that will provide for you and your loved ones well into the future.