Have an IRA? Make Sure You Understand Recent Changes to the Law
New legislation has eliminated the “stretch” provision when leaving your IRA to a beneficiary, potentially costing your beneficiary higher taxes on the gift.
In January 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act took effect and eliminated the ability to pay out a retirement account over the life expectancy of most beneficiaries who inherits the account. There are limited circumstances where the beneficiary can still enjoy the “stretch” benefits, such as surviving spouses and minor children.
Prior to the law’s enactment, individuals who inherited an IRA could “stretch” the distributions out over their life expectancy, thereby mitigating their tax hit (if you take out a higher amount of money, it could subject you to a higher tax rate on those funds). This has been a very popular estate-planning tool. For many Americans, IRAs serve as an effective means of transferring wealth to future generations.
For example, let’s say Dale is an 80-year-old man who wants to leave his IRA with $500,000 to his 20-year-old grandson, Chip. In the past, Dale could arrange it so Chip could withdraw smaller sums over a long period of time (Chip’s life expectancy). Now, Chip must pull out the total amount within 10 years of Dale’s death.
The elimination of the “stretch IRA” is just one of the changes from the SECURE Act, which is the most sweeping retirement legislation in more than a decade. The new law makes many changes to the treatment of retirement assets in a variety of ways. Some other important changes include:
- The age limit for IRA contributions has been removed. So long as an IRA owner is still working, he or she can continue to contribute to his or her retirement account at any age.
- The age at which IRA owners are required to take minimum distributions has increased from 70.5 to 72, allowing more time for the funds to grow before the IRA owner pays tax on the funds.
- New parents can take a $5,000 withdrawal penalty-free after the birth or adoption of a child.
If you have an IRA that you plan to leave to your beneficiaries, it’s wise to revisit your estate plan and contact your tax advisor to evaluate your retirement and planning strategies.