The Secure Act was recently passed into law on December 20th, 2019. The Secure Act represents one of the most significant shakeups for retirees since the Pension Protection Act of 2006. As with most things, there are some positives and negatives that came out of the Secure Act. One of the most notable changes is how we leave an inheritance or how we receive inherited money from retirement plans.
For this example, let’s say you an inherited an IRA from your mother once she passed away and it had $100,000. Under old rules this was a very simple process, you would work with an advisor to move the funds into your name in an account formerly referred to as a “stretch” or inherited IRA. You could have this $100,000 postponed as income for your entire life if you withdrew the required annual minimum. Since an Inherited IRA is still an IRA, you must pay income taxes when funds are withdrawn at your current tax rates, because taxes were not paid when money went into the account. In most cases, if set up properly, withdrawing inherited funds were rarely a hard-hit tax wise.
Now let’s look at the same scenario under the Secure Act. You inherited an IRA from your mother and still move the money into an Inherited IRA but now you must pull all the $100,000 out of this account within a period of 10 years. For example, you could pull $10,000 every year or pull $10,000 the first year and not pull the remainder $90,000 until the 10th year. There is no stipulation on how much you can or can’t pull every year, but all the money must be out of that account after the 10th year. Under this new law, you will be more likely to run into a scenario where it forces you to pay more in income taxes.
Below are a few exceptions to the new Secure Act rule:
- The person you are leaving the money to is a minor, in which case they can wait until the 10-year clock starts
- You inherited it from a spouse
- Disabled individuals
- The person is not more then 10 years younger than who they inherited it from
- ROTH IRA’s
The passing of the Secure Act reinforces the importance of consulting with a financial advisor when inherited money is in play, regardless of the amount, so you can be advised of your options and select the best strategy for your individual needs.