The Secure Act has been languishing in the Senate for some time. However, that doesn’t mean it won’t pass and, if it does, it could have a significant impact on your retirement accounts. While many would consider the changes beneficial, others aren’t so sure. If approved, the Secure Act changes how inherited IRAs would be managed, and not everyone is thrilled about it.
How the Secure Act Changes Heir Rights
If the Secure Act goes into effect, it will fundamentally alter how non-spouse heirs of an IRA can handle the money. Under current law, a non-spouse beneficiary has the ability to stretch out over the course of their life expectancy the minimum required distributions; an approach often referred to as the “stretch IRA.”
The current approach allows more of the money to remain in the account, giving the IRA the ability to grow tax-deferred for longer. Plus, since the withdrawal sizes would potentially be smaller, it provides the heir with a chance to reduce their tax liability each year.
However, if the Secure Act becomes law, the stretch IRA method won’t be available. Instead, non-spouse heirs would have to empty the account within ten years. This means, for heirs who would usually have spread the withdrawals out over a longer period, they have to remove more money annually than they would under the old law. Since the withdrawals will be larger and are taxable, their tax burden goes up accordingly.
Plus, the increase in the heir’s tax bill might not just impact the withdrawals. It could also affect their earned income, making larger payments even more costly.
Estate Planning for the Secure Act
Since the Secure Act would alter non-spouse heir rights for IRA, it may fundamentally change how a person handles estate planning. The new rule could be a burden on the original IRA owner’s family, so they might choose a different tactic.
Under current law, younger heirs get a significant benefit. They can make smaller withdrawals over the course of their life, allowing them to benefit substantially from compounding. In some cases, it may make leaving an IRA to a child – say, to help fund a grandchild’s college education – a less viable option.
Not All Heirs Impacted
It is important to note that not all heirs would be impacted by the change. Aside from spouses, beneficiaries who are 10 years (or less) younger than the account holder, the minor child of the account holder, or are chronically ill or disabled aren’t affected by this part of the Secure Act (if it becomes law). However, an heir that falls into every other category would be, so account holders may choose to leave their IRA to another family member who would get the most benefit instead of the person they would prefer.
The Secure Act hasn’t passed yet, and it’s possible that it never will. But, by understanding how it can impact an inheritance, account holders can make plans now. That way, if the Secure Act becomes law, they can adjust their strategy if necessary.
Do changes to heir rights worry you? Why or why not? Share your thoughts in the comments below.
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