New law could affect IRA inheritance

| Jan 9, 2020 | Estate Planning |

Most people in Texas and across the country spend a large part of their lives planning for their retirement. In an ideal situation, a person has more than enough to provide support throughout his or her retirement with perhaps even some leftover to leave to beneficiaries. However, some professionals warn that the recently passed Secure Act could have a significant impact on those anticipating an IRA inheritance.

Before the law went into effect, beneficiaries who were not married to the owner of the IRA had the option of withdrawing only the required minimum distribution, calculated based on several factors, such as the recipient’s age, which reduced the tax burden. In some cases, a benefactor might use a trust to pass the IRA to beneficiaries and including a provision that the latter are only allowed to withdraw the required minimum distribution to protect the asset from being wasted. However, there are no required minimum distributions under the new law for inherited IRAs, and other forms of retirement accounts, until 10 years have passed and the beneficiary is required to withdraw all funds and close the account.

If there is a provision in place limiting the beneficiary to only required minimum distributions, he or she will not have access to the funds for 10 years because no such requirement is present until that time. Additionally, the funds will be taxed at the beneficiary’s tax bracket. This new law does not affect beneficiaries who are spouses, those already taking required minimum distributions, minor children or people with disabilities.

The goal for most benefactors in Texas is to leave their assets to someone close to them. However, the Secure Act could potentially undermine their good intentions. As such, reviewing estate planning documents can help ensure that the IRA inheritance they plan to leave their beneficiaries will be passed down as planned. Doing so can help avoid assets that are excessively taxed.