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What are the new rules on inherited IRAs?

Monday, March 02, 2020

The Secure Act was passed as part of the 2020 spending bill. The new law contains many changes to the existing retirement plan distribution rules. The Secure Act focuses heavily on changes to retirement accounts. There are many changes including the limits on the “stretch IRA”.

So, what is the stretch IRA?

Essentially if you inherited an IRA before the Secure Act, the tax protection lasted essentially for your lifetime. Thus you could pass assets tax-free to your non-spouse and they could spread those funds for a lifetime. They then just needed to take the required minimum distribution based on their life expectancy.

Now with the tax law changes, the stretch IRA has been eliminated with limited exceptions. Your spouse will have a lifetime to spread the IRA usage. However, almost everyone else must take their required minimum distributions within ten years of your death. This is a major change as non-spouses such as grandchildren will have to take all their distributions within ten years of your death (or if they are minors, within ten years of turning 18) 

It is important to note that those who inherited these accounts before the law was passed are" grandfathered " into the old law.

So, the big question is how will the Secure Act impact my estate plan?

Obviously, for those using this tax method to pass funds to their heirs now will need to rethink their strategy. There is no one size fits all answer to this question. We recommend you consult review your beneficiary designations and consult with your CPA and/or estate attorney regarding these changes.