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Got a big IRA? Who should you leave it to? Thumbnail

Got a big IRA? Who should you leave it to?

In past blog posts, I talked about the broad changes pertaining to the SECURE Act regarding IRA's.

One key take away was there will no longer be the same opportunities when it comes to a "Stretch IRA".

The Stretch IRA was a way to leave an IRA to a non-spouse and have that IRA potentially last for more than one generation.  Spouses could always stretch the IRA over their lives.

Let's say you died in 2019 at 70 leaving a $1,000,000 IRA to your 40 year old daughter.  She would be required to take out of the IRA approximately $23,000 the year following your death.  Then each year, would take another similar required distribution (based on the account value on December 31st of each year and her age).  If the money was invested well and growing, this account could last her whole life and if something happened to her, could pass to your grandchild.

That all changed with the passing of the SECURE Act.  Now, generally speaking, if you leave an IRA (or other retirement account) to a non-spouse, they need to empty this account within 10 years. There are no more Required Minimum Distributions.  One could leave the IRA as is and then in the 10th year, take it all at once.  Bear in mind, any money taken whether in chunks or all at once is taxed as ordinary income.

There are some exceptions to the 10 year rule. I got a call from "Mary" asking what would happen if she kept her disabled nephew on her IRA as a primary beneficiary.  If the beneficiary is disabled, the old rule can apply and provide income for longer than the new 10 year rule and allow the IRA to be stretched over their lifetime. 

Another exception is if the beneficiary is a minor.  Let's say Timmy inherits an IRA from his dad when he is 5 years old.  Timmy would be allowed to take distributions until he is at the age of majority and THEN gets another 10 years before having to empty the account.  Bear in mind, if Timmy inherited this IRA from his grandfather and not his dad, the 10 year rule apples from the date of death.

So, it may appear at first glance that a surviving spouse is the logical choice to leave an IRA to.  Reason being, this law didn't change.  A surviving spouse can treat this inherited IRA as their own and delay distributions until they are 72 (the new age when required distributions must begin if one passed away in 2020 and beyond).

Remember the 10 year rule for non-spouses?  Well, if one was less than 10 years younger than the deceased, they can still stretch the IRA over their lifetime.

Let's say Ross is 72 when he dies and is unmarried and has a sister Monica that is 68.  Since Monica is less than 10 years younger, she is allowed to take these required distributions over her life.  If she lives until 90, she took distributions for 22 years and not for only 10.

As you can see, there are many factors to consider and that is why we must look at each situation carefully.

If one has a small IRA, this new rule might not even be an issue as the beneficiary might empty the account out within the 10 years anyway due to just needing the money.

The real issues usually lies when one has a larger IRA as those in the past, could have been stretched over more than one life potentially.

Questions, give me a call or shoot me an email.

I'm here to help.

All the best.

Rick Fingerman, CFP®




Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

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