Under the Secure Act passed in December 2019, with some exceptions, non-spouse IRA beneficiaries must withdraw all funds from their inherited IRA within 10 years of the owner’s death. This applies to IRA account holders who died after December 31, 2019.
If the IRA is not a Roth IRA, taxes must usually be paid on the full IRA withdrawal for the year it is taken. For many children, this inheritance comes at a time when they are in their highest earning years, and therefore already in a high tax bracket. Unfortunately, much of what you leave them may go to pay taxes, and in a relatively short period of time.
There are several ways to plan for non-spouse IRA inheritance.
- Consider converting funds from a traditional IRA to a Roth IRA. Not only may a conversion reduce your future required minimum distributions, withdrawals of contributions to a Roth IRA are income tax-free at any time. However, earnings may be withdrawn tax-free only if the Roth IRA is 5 or more years old, or if it was 5 or more years old at the original owner’s death.
- Buy life insurance with your children as beneficiaries to provide them with income tax-free funds to pay the taxes on the forced IRA withdrawals.
Exceptions to the 10-year rule:
- An IRA inherited from your spouse
- Your beneficiary is a minor child
- Your beneficiary is chronically ill or disabled
- You’re not more than 10 years younger than the account owner
There are many nuances to Roth IRAs and Roth conversions, therefore it’s important for you to work closely with your financial and tax professionals before taking action. Beneficiaries should consult their attorney and financial and tax professionals to understand all of their options with inherited funds.
It’s never too late to look at your opportunities and plan for your future and your family. I encourage you to begin today! Call us at 256-417-4870. We can help guide you through this.