New rules for inherited IRAs impact bequests

Even though the SECURE Act was signed in 2019, the IRS just released its interpretation of the tax code, and the resulting changes to how IRAs are inherited should prompt financial planners to review all beneficiary designations. of their customers,” said Tim Steffen. , director of tax planning at Robert W. Baird & Co.

“The SECURE Act has some pretty significant and important changes that affect all of us as advisors and planners and, frankly, as future retirees ourselves,” Steffen said during a presentation at this year’s Morningstar Investment Conference. week. “The problem we have with the SECURE law is that it came into effect in December 2019 and a few months later the world changed. And everyone kind of forgot what the SECURE Act was. Things like Covid and the stock market crashes and PPP loans and the CARES Act, all of those things came into play and the SECURE Act was standing in the background saying, ‘Hey don’t forget me, I’m a fat problem. ” ”

This big issue is once again on the IRS’ radar, he said, and in March the IRS released its proposed language around the new tax code, the language of which Steffen described as “clear as mud”.

More details could be provided, he said, but in the meantime, the changes to inherited IRAs are significant and require careful consideration of any client’s pre-retirement planning in terms of beneficiaries, and any beneficiary client from an inherited IRA. when the owner died in 2020 or later.

New rules for IRA owners

For IRA owners, the SECURE Act has raised the required minimum distribution (RMD) age from 70½ to 72. The Required Start Date (RBD) can still be April 1 of the year after a client turns 72, but two RMDs would be required in that year.

An exception to the new age RMD is for employees who continue to work after age 72 (they can delay distributions for an employer plan until retirement). There is no change to the age for early withdrawals without penalty, still 59½, or the age for qualified charitable distributions, still 70½.

“Is it really that bad? In fact, it’s kind of because it leads to a few planning opportunities,” Steffen said. “The first is what I call the ‘hollow year’ opportunity. There’s a window of time between when people retire – call it around age 65, when wages stop and income goes down in most cases – and they start Social Security, where they have much more control over their taxable income. And now, with RMDs extending over a few years, you have an even bigger window of time for planning opportunities.

Some of these planning opportunities include Roth conversions, capital gains recognition, low cost company stock diversification or sale of stock and exploiting a lower capital gain rate, a he declared.

“The other thing we get is a great opportunity for spouses who inherit a retirement account,” Steffen said, adding that there are two options for that spouse. The first is that they can incorporate the inherited IRA in their own name and it is treated as if it had always been their IRA (RMD calculated with the uniform mortality table). Or they can keep it as an IRA beneficiary and don’t have to start RMDs until the deceased owner turns 72 (RMDs calculated with the unique mortality table).

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