If you have a retirement account or are set to inherit one, recent changes under the SECURE 2.0 Act could significantly impact how your IRA is managed and taxed. These new rules affect both beneficiaries named directly on an IRA and those inheriting through a trust. Here’s what you need to know to plan wisely and avoid unexpected tax burdens.
How Inherited IRAs Worked Before SECURE 2.0
Traditional IRAs allow individuals to save for retirement using pre-tax dollars. However, once the account holder reaches age 73, they are required to take Required Minimum Distributions (RMDs)—mandatory withdrawals that are subject to income tax.
Previously, if a beneficiary inherited an IRA, they could stretch out those distributions over their own life expectancy. This allowed the account to continue growing tax-deferred, potentially for decades, while postponing significant tax liabilities.
The New Rules for Inherited IRAs
Under SECURE 2.0, the rules have changed. Now:
– If the original IRA owner was already taking RMDs when they passed, the beneficiary must continue taking RMDs—even if they are not yet at retirement age.
– Regardless of RMDs, the entire inherited IRA must be liquidated within 10 years.
This means that beneficiaries who inherit taxable IRAs could face a significant tax bill in year 10, when they are required to withdraw and pay taxes on the full remaining balance.
Example:
Before SECURE 2.0, if a 45-year-old inherited an IRA, they could stretch distributions over their own lifespan, delaying large withdrawals until retirement. Now, they must withdraw everything within a decade, potentially while still in their peak earning years—resulting in higher taxable income.
How Trusts Can Still Be Used for IRA Planning
Naming a trust as the beneficiary of an IRA can still be a useful estate planning strategy, but the rules are now more complex.
To maintain tax advantages, a trust must qualify as a “see-through” or “look-through” trust, which requires:
- The trust to be irrevocable upon the IRA owner’s death.
- Clearly identifiable beneficiaries.
- Proper documentation provided to the IRA custodian by October 31 of the year following the owner’s death.
There are two main types of trusts used for inherited IRAs:
1. Conduit Trust:
- The trust follows the 10-year payout rule.
- Distributions must pass directly to trust beneficiaries.
2. Accumulation Trust:
- Can hold onto funds beyond 10 years.
- However, undistributed funds may be taxed at high trust tax rates.
This means that while trusts remain an option for managing IRA inheritances, careful structuring is required to minimize taxes and ensure compliance with the new rules.
Exceptions to the 10-Year Rule
SECURE 2.0 provides some exceptions for certain beneficiaries, who may still qualify for extended tax-deferral beyond the 10-year rule. These include:
– Surviving spouses
– Minor children of the account owner (until they reach adulthood)
– Disabled or chronically ill individuals
Each of these beneficiaries may have different distribution rules, allowing them to stretch the IRA benefits over a longer period.
What You Should Do Next
If you have an IRA or expect to inherit one, now is the time to review your estate plan to avoid surprises. At Delaney Law in Brevard, NC, we can help you:
– Understand how SECURE 2.0 affects your retirement savings.
– Determine if a trust is the right option for your IRA.
-Develop a strategy to minimize taxes and protect your legacy.
Schedule a consultation with us today to ensure your estate plan is SECURE 2.0 compliant and set up for long-term success.
