Photo of Eric R. Ebbert, CFP®, MBA, CEO Eric R. Ebbert, CFP®, MBA, CEO Sep 11, 2020

Many people who contributed to an IRA were aware of the concept of stretching their IRA. Under this concept, IRA accounts were passed to a beneficiary after the owner had died. The beneficiaries then “stretched” this IRA by taking only minimum distributions, which hopefully were lower than the tax-deferred growth of the IRA. Thus, the IRA might be stretched over a lifetime.

For example, if someone with $1 million in their IRA passed away and left it to their grandchild who is 30, the grandchild would only have to take about 1.5% from the IRA the first year, and each year thereafter they must take a distribution with the percentage amount gradually increasing each year based on the grandchild’s life expectancy. If the grandchild lives to age 85, it would be stretched for another 65 years, which would be well beyond the grandparent’s life expectancy. The SECURE Act, passed in 2019, changed this dramatically.

How does the SECURE Act impact inherited IRA savings?

The Setting Every Community Up for Retirement Enhancement Act of 2019, known as the SECURE Act, was passed to help increase access to tax-advantaged accounts and prevent older Americans from outliving their assets. Part of what the SECURE Act affects is how beneficiaries can use inherited IRA savings.

As of 2020, when one inherits an IRA, certain beneficiaries (non-spouses, minors, those who are chronically ill or disabled, and those who are less than 10 years younger than the owner) must distribute the entire funds of the inherited account by the end of the 10th year following the death of the owner. Previously, these limits did not exist and one could stretch out an inherited IRA for decades. Now, beneficiaries can still stretch out their savings for a few years, but everything must be withdrawn by the deadline. 

Besides being prevented from stretching their savings, beneficiaries must consider how withdrawing all the funds from an IRA savings in 10 years or less affects their taxes. Withdrawing large sums from an IRA can push you into a higher tax bracket, which means you owe more in taxes for that year. It is important to be strategic about your withdrawals and taxes. A financial advisor can help.

Talk to a ProVise CFP® professional about your retirement strategy

Have you inherited an IRA or want to have a plan to benefit the beneficiaries of your IRA? Some careful strategy can help minimize your tax liability while helping you get the most out of your IRA. 

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can work closely with you to help you maintain a retirement strategy that works for you. When making a plan, we get to know you and your current financial circumstances, goals, risk tolerance and personal values that are all an important part of who you are. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about retirement planning? Contact ProVise today to schedule a complimentary consultation.