“The SECURE Act was passed in 2019, took effect in 2020, but look at everything that happened in 2020,” said Slott. “People forgot about the SECURE Act because it was overshadowed.”
The SECURE Act mandates that for most designated beneficiaries, all IRA assets be withdrawn before the end of the 10th year after the death of the original account owner, said Slott. After some confusion, recent clarification from the IRS confirms that annual required minimum distributions are no longer required from most inherited IRAs.
Slott identified three types of IRA beneficiaries: non-designated beneficiaries,eligible designated beneficiaries and non-eligible designated beneficiaries.
Non-designated beneficiaries are non-human beneficiaries like estates and charity trusts that will likely be subject to a five-year withdrawal rule mandating that all of the IRA’s assets are distributed before the end of the fifth year after the death of the former account owner.
Eligible designated beneficiaries still get the stretch IRA. There are five different classes of eligible designated beneficiaries: surviving spouses, minor children until the age of majority, a disabled person, a chronically ill person or someone not more than 10 years younger than the original IRA owner.
Non-eligible designated beneficiaries encompass any other living human being indicated by an IRA’s beneficiary form, said Slott, and they are bound by the 10-year rule.
“Then there is this other class of beneficiaries advisors have to keep track of: beneficiaries who inherited their IRA before the SECURE Act took effect in 2020,” said Slott. “They’re grandfathered in. So a two-year-old grandchild who inherited on 12/31/2019 gets to go out the 80 years of their life expectancy, but if that child inherited just one day later, they would be bound by the 10-year rule. So it depends if people inherited before 2020 or after 2019, and you’ll only need to know about these two different systems for about 80 years.”
Most advisors’ clients today probably inherited IRAs under the pre-SECURE Act rules, said Slott, but advisors need to be prepared for an influx of IRA beneficiaries who will be bound by the new, more complex rules system.
For those bound by the new rules, there is greater incentive to convert to a Roth account or to take down the asset in traditional IRAs at low rates today and put them into a life insurance policy, he said.
While advisors and tax planners will need time to adjust to the new IRA tax rules, Slott said that the changes make sense.
“Congress didn’t want the IRA to be an estate planning vehicle,” he said. “This has incentivized us to do better planning the planning we should have been doing all along.”