The SECURE Act's Impact on Inherited Retirement Accounts

Navigating inherited retirement accounts has become more complex due to significant regulatory shifts brought by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and subsequent updates in the SECURE 2.0 Act of 2023. Here’s an overview of how these changes impact beneficiaries and what it means for estate planning.

SECURE Act of 2019: Key Changes

The original SECURE Act, enacted in 2019, overhauled the distribution rules for inherited retirement accounts. Previously, designated beneficiaries could often “stretch” required minimum distributions (RMDs) based on their life expectancy, allowing tax-deferred growth over a longer period. However, the SECURE Act replaced this with a 10-year rule for most non-spouse beneficiaries:

1. 10-Year Distribution Rule: Non-spouse beneficiaries now generally must withdraw all assets from an inherited IRA or retirement plan within ten years of the account holder’s death, rather than over their lifetimes. This change speeds up the timeline and may accelerate taxable income for beneficiaries​​.

2. Exceptions to the 10-Year Rule: Certain "eligible designated beneficiaries" (EDBs), such as surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased, are exempt from the 10-year rule. These beneficiaries can still stretch distributions over their life expectancies until other conditions trigger the 10-year rule.

3. Increased RMD Age: The age for required minimum distributions (RMDs) was extended from 70½ to 72, giving account holders a bit more flexibility before they must start taking distributions​.

SECURE 2.0 Act of 2023: Further Adjustments

In 2023, the SECURE 2.0 Act introduced additional refinements, giving more flexibility but also adding complexity for inherited accounts:

1. RMD Age Increased to 73 (and Future Increase to 75): Starting in 2023, the RMD age was raised to 73, with a scheduled increase to 75 by 2033. This shift allows more time for retirement accounts to grow before mandatory distributions begin, benefiting account holders and potentially increasing what beneficiaries might inherit.

2. Clarification on the 10-Year Rule for Successive Beneficiaries: The 10-year rule remains but was clarified for EDBs who initially qualified for life expectancy payouts. Upon the death of an EDB, any remaining assets generally need to be distributed within ten years​​.

3. Elimination of Certain RMD Penalties: SECURE 2.0 temporarily suspended penalties for missed RMDs for specific beneficiaries, acknowledging that the rule changes might create confusion. Beneficiaries in certain circumstances now have a grace period to adjust their distributions without incurring penalties​.

4. New Opportunities for Roth Conversions: SECURE 2.0’s encouragement of Roth conversions aligns well with tax planning for beneficiaries. Roth accounts are not subject to RMDs during the original account holder’s life, potentially simplifying inheritance and enhancing the value for beneficiaries due to tax-free withdrawals​.

Practical Impact for Beneficiaries

The rapid changes brought by both SECURE Acts underscore the need for strategic planning:

• Beneficiary Designations Matter: Properly designating eligible beneficiaries can provide valuable flexibility under the new rules.

• Tax Planning for Heirs: Since distributions must often be taken within a shorter time, beneficiaries may face higher tax obligations. Strategies like Roth conversions can help mitigate this.

• Estate Plan Revisions: Account owners should review and possibly revise their estate plans to align with SECURE 2.0's distribution requirements and tax implications.

By staying informed and planning accordingly, beneficiaries can better manage inherited accounts under these complex rules. Consulting with an estate planning attorney or tax professional is highly advisable to navigate these changes effectively.

The SECURE Act

On December 20, 2019, President Trump signed the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act into law. The SECURE Act, effective January 1, 2020, impacts people with retirement accounts.

There are three main ways that this impacts most people: 1) you will now be required to withdraw from retirement accounts at age 72 instead of 70 ½ ; 2) the Act removes age restrictions for contributions; and 3) any inherited retirement accounts will have a ten-year distribution limit for most people instead of the “lifetime stretch”. The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals.

Before the SECURE Act

Previously, any non-spouse beneficiary who inherited a retirement account was able to stretch out the required minimum distributions over his or her lifetime. Since the money was not taxed until it was distributed, it allowed beneficiaries to take minimum distributions, only pay income tax on that distribution, and defer paying income taxes on the balance of the inherited retirement account until actual distribution. 

After the SECURE Act 

Now, any non-spouse beneficiary is required to take all the distributions from the inherited IRA within 10 years. This means that the inherited retirement account will be taxed sooner and potentially at a higher rate over time. 

Spouse beneficiaries: If you inherit a retirement account from your spouse, nothing will change from the previous law. You will still be able to roll over the deceased spouse’s retirement accounts into your own.

Planning for the SECURE Act

For married couples who have retirement assets, and plan to leave any remaining retirement assets to the surviving spouse, the SECURE Act does not change much for you. Your spouse can still rollover any inherited retirement assets from you. For those who are either unmarried or are currently the surviving spouse, and you plan on leaving retirement assets to someone who is not your spouse, then this means that your beneficiaries will have a much shorter time (a maximum of 10 years) within which to distribute the funds in the inherited retirement account. This may result in triggering income tax sooner than expected, and perhaps additionally losing creditor protection.

Contact us to discuss whether your current estate plan is impacted by the SECURE Act.