Our friends at DP Legal Solutions discuss how the landscape of retirement planning changed drastically with the passing of the SECURE and SECURE 2.0 Acts. The days of the “stretch IRA”—where a child could inherit an account and take small distributions over their entire lifetime—are largely over. We stay on top of these shifting laws so you don’t have to. An asset protection lawyer can help you adapt your estate and tax strategy to these new rules. Contact an experienced lawyer today to update your tax strategy for the new era.
The New Standard: 10 Years to Empty
For most people who inherit a retirement account today, the law requires that the entire account be liquidated within 10 years of the original owner’s death. This applies to both traditional and Roth accounts, though the tax implications differ.
This 10-year rule can create a significant tax burden for your heirs. If a child inherits a large IRA during their peak earning years, forcing them to take all that income within a decade could push them into the highest possible tax bracket.
The “Eligible Designated Beneficiary” (EDB) Exception
There are a few specific categories of people who can still “stretch” distributions over their remaining life expectancy. These are known as Eligible Designated Beneficiaries:
- Surviving Spouses: They still have the most flexibility, including rolling the assets into their own IRA.
- Minor Children: They can use their life expectancy until they reach the age of majority, at which point the 10-year clock starts.
- Disabled or Chronically Ill Individuals: These beneficiaries are granted special status to preserve the stretch for their lifetime.
- Individuals Close in Age: A beneficiary who is not more than 10 years younger than the decedent.
Strategies for the Modern Era
Because of these rules, we may need to rethink your beneficiary designations. Perhaps it makes more sense to leave the IRA to a spouse and other assets to the children, or maybe a Charitable Remainder Trust (CRT) is a better fit to provide an income stream that lasts longer than 10 years. Proper planning can turn a tax “hitch” into a smooth transition. For expert guidance on the SECURE Act, contact an experienced lawyer today.