If you are expecting to inherit an IRA from a parent or a grandparent in the coming years – you just lost an important benefit – thanks to SECURE Act that went into law earlier this week.
Inherited IRAs lost STRETCH opportunity due to SECURE Act
Starting in 2020, if you are a non-spouse beneficiary of an inherited IRA – You have a maximum of 10 years to take distributions from the IRA and pay taxes on them. You don’t have to take distributions evenly during the 10-year period, but you MUST take it all by the end of the 10th anniversary of the inheritance.
In other words, you WILL NOT be able to stretch the distributions over your lifetime – as allowed previously.
Let me explain this with an example:
Let’s say you’re in your mid-forties, you are in a high income-tax bracket and you inherit a $1M IRA from your parent in February 2020. Let’s also say your life expectancy according to IRS tables is 85.
Before the SECURE Act, you were able to spread the distributions over 40 years – from your age 45 to your life expectancy age 85 – taking about $25,000 each year. The impact of this on your taxes could be minimal considering the low-income or no income years in the next 40 years!
Now, look at the same situation after the SECURE Act – You MUST take the entire $1M in the next 10 years. If you choose to take even distributions, this will translate into ~$100,000 additional income each year. Assuming you are at the peak of your career and will continue to be in high-income tax bracket next 10 years, you are likely to pay significant tax dollars on your inherited IRA distributions.
Perhaps one strategy is – to see if there are going to be any low-income years in the next 10 years, and take distributions in those years as opposed to evenly distributing.
So, the point is – Inherited IRAs lose their good old STRETCH opportunities starting the year 2020 – due to SECURE Act.
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