Not sure if this has been discussed here yet, but the new SECURE Act that Congress passed (at the last minute) last week will probably affect many of us here. In particular, it’s not good news for people who hoped to leave traditional IRA money to their kids.

As you may already know, beneficiaries of an inherited traditional IRAs used to be able to “stretch out” distributions of their Inherited IRA over a period of their (expected) life span. This allowed beneficiaries to manage the amount of taxes paid on distributions in any one year, thus reducing their total tax burden for the year. Under the new law, all distributions must be taking over a 10 year period. This could result in a significant reduction in the amount of money an inheritor will actually wind up with.

It has left me wondering if I can trust the government to honor the financial commitments it has made to savers in the future. Other provisions of this act scare me a little, too.

Although this post could easily turn political, it’s worth remembering that the act passed with support from both parties.

[www.forbes.com]



Edited 1 time(s). Last edit at 12/31/2019 02:04PM by Ammo.

Umm, seems to me that it's entirely fair that the tax benefits end within 10 years after the IRA donee dies....

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Ammo
"It has left me wondering if I can trust the government to honor the financial commitments it has made"

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Athens, OH

The IRA and its attendant tax benefits are intended to provide income for the retiree, not a perpetual tax loophole for the retiree's heirs.



Edited 1 time(s). Last edit at 12/31/2019 02:55PM by Acer.

My wife inherited a portion of her mom's IRA in November, so she stays under the old law.

Both of the previous comments are true. But since the original law allowed for the "stretch IRA" it changes calculations in a significant way. For us, our kid and her husband are likely to inherit our IRA's in their prime earning years unless we manage to hold on for a LONG time! That means they'll be paying a much higher tax rate on those funds than would we. We are trying to finesse it by converting most of our IRA's to Roth IRA's and paying the tax at our current rate. The other benefit of a current conversion is that the current tax rates are due to revert back to higher rates in 2026. We'll be done with the conversions by then and so RMD's will be relatively small.

It's more complicated than just "10 years and done."

E.g. if a minor child inherits they must immediately start taking minimum distributions based on their life expectancy (as per previous rules for inherited IRAs)

But then when they reach the "age of majority" in their state they must switch to the 10 year rule (no annual distributions required, they can defer until the 10th year)

I can see a lot of the above inadvertently staying with distributions based on the life expectancy tables instead.

Or, if you're a cynic like me, what about an unscrupulous beneficiary who inherits in 2020, but in 2028 chooses to move the inherited IRA to another custodian, telling the new custodian the data of death was not 2020, but a later year?

I've moved an inherited IRA twice to new custodians & they simply accepted whatever I told them, never asking me for any verification.



Edited 2 time(s). Last edit at 12/31/2019 04:20PM by Bill in NC.

I wasn’t clear enough on this issue in my OP. The reduction in the time frame for receiving distributions is disappointing to me, but it’s not necessarily unfair. Many have made the point that the IRA was never intended to be a way to perpetuate wealth over generations.

However, I think it is unfair to pass a last minute law that changes the rules that people have relied upon for years to plan their IRAs. It seems to me that that it would have been more fair to grandfather in those who planned in previous years.

I’m sorry to sound like an entitled boomer when so many people are having a tough time saving for their retirement. However, I think practical effect of this act is going to hurt millennials who inherit a Traditional IRA the most. This is because traditional IRA beneficiaries will be forced to take their money in a shorter time period than previously, thus creating more income per year. This will likely force them into a higher tax bracket each year during the 10 year period. A longer distribution period allows beneficiaries to take smaller amounts over more years and incur less total taxes. In short, it’s better to take inherited IRA distributions over a longer time period than a shorter one.

EDIT: thanks, Michael - your explanation is clearer and more concise than mine. Hello Roth!



Edited 2 time(s). Last edit at 12/31/2019 04:35PM by Ammo.

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Ammo
I’m sorry to sound like an entitled boomer when so many people are having a tough time saving for their retirement. However, I think practical effect of this act is going to hurt millennials who inherit a Traditional IRA the most. This is because traditional IRA beneficiaries will be forced to take their money in a shorter time period than previously, thus creating more income per year. This will likely force them into a higher tax bracket each year during the 10 year period. A longer distribution period allows beneficiaries to take smaller amounts over more years and incur less total taxes. In short, it’s better to take inherited IRA distributions over a longer time period than a shorter one.

EDIT: thanks, Michael - your explanation is clearer and more concise than mine. Hello Roth!

I don't think there's anything wrong with a tax-deferred income. The taxes get paid either way. They just don't come all at once. There was something of a social contract of deferred taxes in exchange for investment in place before and this upends the whole thing.

And I'm pissed off that this is just another way to screw the middle class to pay for the tax cuts for the ultra-wealthy.

...My parents intended an inherited IRA to work like an allowance for my brother who cannot work and has trouble managing money. This will mess that up. Make him take the money over 10 years and the money will be gone in 10 years.

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Thanks for posting this. I've been thinking about doing some estate planning since I have two young children. If either me or my wife die its simple - we inherit each other's stuff. Its more complex when we both die at the same time.

I believe trusts could be used to skirt laws like this. Is that still true?

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mattkime
Thanks for posting this. I've been thinking about doing some estate planning since I have two young children. If either me or my wife die its simple - we inherit each other's stuff. Its more complex when we both die at the same time.

I believe trusts could be used to skirt laws like this. Is that still true?

If you’re rich enough.

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Saint Cloud, Minnesota, where the weather is wonderful even when it isn't.

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Speedy

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mattkime
Thanks for posting this. I've been thinking about doing some estate planning since I have two young children. If either me or my wife die its simple - we inherit each other's stuff. Its more complex when we both die at the same time.

I believe trusts could be used to skirt laws like this. Is that still true?

If you’re rich enough.

fwiw I've seen numbers hovering around the $3k mark for estate planning and setting up trusts. Seems like that would be worthwhile for a large number of upper middle class people.

.....remember.....trust is a two way street....

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_____________________________________

I reject your reality and substitute my own!

According to Ed Slott there are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule

....what about stretch pants.....?

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I reject your reality and substitute my own!

I think I read somewhere that trusts are affected by this Act, too. But I’m not sure how/why.



Edited 1 time(s). Last edit at 01/01/2020 12:12AM by Ammo.

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Sarcany
And I'm pissed off that this is just another way to screw the middle class to pay for the tax cuts for the ultra-wealthy.

.

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Sarcany
..My parents intended an inherited IRA to work like an allowance for my brother who cannot work and has trouble managing money. This will mess that up. Make him take the money over 10 years and the money will be gone in 10 years.

That stinks, but how were they going to stop him from excessively withdrawing funds from the IRA anyway? Would he be willing to accept a defined annual payout amount set by someone else? If so, could that person control the funds and disburse them on a transparent and legal schedule? There would be costs, of course, but still a lot cheaper than a traditional trust.

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rj
AKA
Vreemac, Moth of the Future