Elean
Hello everyone and welcome to the Paragon Podcast. I’m here with Evan Shorten, the firm’s founder and principal.

Evan
Hello everyone. I hope you’re all doing well. Before we get started, I want to thank everyone who listens to the podcast. If you have not subscribed, I highly recommend it as we cover a lot of important topics concerning your wealth. You can subscribe to the podcast on the Apple Podcasts App, Stitcher Radio, or you can subscribe to our YouTube channel.

Elean
So in this episode we want to review a previously discussed topic from 2020. Admittedly this topic didn’t get too many views back then, but it’s probably one of the most important topics for our clients and our specific audience. Today we want to discuss changes in IRA beneficiary rules that were imposed by the SECURE Act in 2020 – and there were a lot. The SECURE Act radically changed how IRAs can be passed on to heirs and this especially impacts IRA owners with large balances.

Evan
As you mentioned, the SECURE Act introduced a lot of significant changes to IRAs. These changes range from contribution age limits, required minimum distributions, to beneficiaries and how the IRA can be liquidated. In this episode we’re just going to focus on IRA beneficiaries since that represents the most significant change to IRAs.

Elean
If you want to listen to the original episode, you can go back to the February 5^th, 2020 episode titled “The Secure Act and Your IRA.” It’s definitely worth listening to so you can learn about all of the major changes not covered in this specific episode. If you’re listening to this episode on YouTube, we’ll include a link to it in the video description.

Evan
If you haven’t stayed up to date to the rule changes concerning beneficiaries, it’s very important that you listen to this episode as the changes are significant enough to impact your estate plan; and while this may not be the most exciting topic, it’s probably one of the most important topics requiring immediate attention.

With that said, the single biggest change to IRAs stemming from the 2020 SECURE Act is the elimination of the IRA “stretch” provision.

Elean
Can you elaborate on the stretch provision and its significance?

Evan
Yes. The stretch provision was a key feature of IRAs that allowed non-spouse beneficiaries who inherited an IRA to spread out the distributions over the course of their life. For those who accumulated large balances in their IRAs, it presented them with a tool that could possibly stretch an IRA over multiple generations with a high degree of tax efficiency. If an IRA could generate enough returns to make up for required minimum distributions, the IRA could continually be passed on.

Elean
Now with the passage of the SECURE Act, congress ended the ability to stretch the IRA distributions. So if a beneficiary can’t stretch the IRA over the course of their life that implies the beneficiary has to spend down or liquidate the IRA before they pass away. 

Evan
Correct. The end of the stretch provision means IRAs can no longer be used as a tax friendly tool to transfer wealth. For IRAs inherited on January 1^st, 2020 and beyond, a non-spouse beneficiary must liquidate the IRA within 10-years of the original IRA owner’s date of death. There are a few exceptions to this and we’ll address those as well.

Elean
Ok, to be clear this is specifically for IRAs that are inherited on or after January 1^st of 2020. If you’re a current beneficiary who inherited an IRA before January 1^st, 2020, these changes do not apply to you.

If you own an IRA and you haven’t passed away yet, congratulations! You’re doing awesome! However, if you haven’t updated your current estate plan since before 2020, it’s important to get on top of it now.

So, with the stretch provision gone, what are the new rules for beneficiaries who inherit IRAs?

Evan
As I mentioned, the SECURE Act requires most non-spouse beneficiaries to liquidate their entire IRA within 10-years after the original account owner’s death. Now there are still a few exceptions with some beneficiaries being allowed to “stretch” distributions. These newly termed “Eligible Designated Beneficiaries” include surviving spouses, minor aged children, beneficiaries who are within 10-years in age of the deceased, and chronically ill or disabled people.

Elean
Ok so let’s go over how each eligible designated beneficiary can stretch distributions beyond the 10-year period starting with spouses.

Evan
There is no denying that spouses are oftentimes the best IRA beneficiary from an estate and tax planning perspective. A spouse can simply rollover the deceased’s IRA into their own without being subject to the 10-year rule. The IRA simply becomes the surviving spouse’s IRA and all of the standard rules surrounding age, contributions, and distributions apply to them.

Now moving to minor aged beneficiaries. In this scenario, the 10-year rule will be applied to the beneficiary once they reach the age of 18.

Elean
Essentially, minor aged beneficiaries have the 10-year rule plus however long it takes them to become an adult. If a 12 year old inherits the deceased’s IRA, they can stretch out distributions for the 6 years until they reach the age of 18, plus the 10-year rule, for a total of 16 years.

Evan
The third type of eligible designated beneficiary is a non-spouse beneficiary who is within 10-years of the deceased’s age. Meaning a beneficiary may be exempt from the 10-year rule if they are similar in age to the deceased.

And the last eligible designated beneficiary type is a beneficiary who is considered chronically ill or disabled. Please, keep in mind, the IRS has their specific definition of chronically ill and disabled. You’ll need to check the IRS code for that specific criteria.

Elean
One other thing to consider is the ever changing landscape with respect to distribution rules. For example, when the SECURE Act was passed in 2020 the 10-year rule didn’t care how a beneficiary spread out the distributions as long as the IRA was completely liquidated by the end of the 10^th year. Well that changed as of March 4^th of this year 2022.

The newest IRS interpretation of the rule states, if the original owner passed away while taking their minimum required distributions, the non-spouse beneficiary must also take required minimum distributions starting in the first year. If the original IRA owner was taking RMDs, the beneficiary of the inherited IRA can no longer delay distributions until the 10^th year.

Lastly, I want to add one last note with regard to the 10 year rule, both traditional and Roth IRAs are subject to the 10-year rule.

Ok, so now that we went over the elimination of the stretch benefit, the 10-year rule, and the most recent update to the 10-year rule, it’s important to mention how this may impact your existing estate plan.

Evan
Right. If you have an IRA with a large balance, it’s time to review your estate plan. Unfortunately, if you already made changes to your estate plan after the SECURE Act was put into law, you have to review it again with consideration to the March 4^th 2022 rule change. This is even more important if you hold several millions in your IRA. The shorter distribution period could result in unanticipated tax bills for your beneficiaries. Don’t forget, if your beneficiary inherits a traditional IRA, they’ll be liable for the income tax on those required distributions. This is also true for IRA trust beneficiaries, which may have originally been created to manage inherited IRA assets.  

While we can’t give specific financial advice on this podcast, it may make sense to consider and discuss some of the following topics with your estate attorney and financial advisor:

Charitable organizations as beneficiaries
Increase life insurance benefits to offset estate taxes
Roth conversion to move funds from your tax-deferred IRA to a tax-free IRA
Increased giving to your heirs during your lifetime to take advantage of the $16,000 annual gift-tax exclusion.

Elean
Ok, so while this podcast is not meant to give financial advice, we hope this episode has given you something to consider with respects to your estate planning and some topics to discuss with your estate attorney, your financial advisor, or even your CPA. If you have any questions for us, please don’t hesitate to reach out to us. We encourage you to email us at [email protected].