IRA Beneficiaries – The Secure Act Changed Everything

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If an IRA participant died prior to January 1, 2020, their beneficiaries were able to stretch out the tax-deferred nature of the IRA while taking mandatory required minimum distributions based on a life expectancy calculation.  Upon the beneficiaries death, the “stretch out” could continue for potentially generations.  However, all of those rules changed when the Secure Act was signed into law.  After January 1, 2020, when an IRA participant dies, the IRA must be emptied within ten years of death unless a beneficiary is an Eligible Designated Beneficiary (EDB).  No longer can anyone other than an EDB use the old “stretch” provisions.  As long as the IRA is emptied within ten years, there is no annual required minimum distribution throughout the ten year period.  A beneficiary can wait until year ten to take the proceeds out and pay the tax if they so choose.  So, effective income tax planning is critical for beneficiaries going forward!

Those who do not need to empty the IRA within ten years are Eligible Designated Beneficiaries as follows:

  1. A surviving spouse of the participant whether in an inherited IRA or in their own using a spousal rollover.
  2. A child of the participant under the age of majority (age 18 in PA).  However, once they reach the age of majority they are subject to the ten year rule.
  3. Someone LESS than ten years younger than the IRA participant such as a parent, sibling, or unmarried partner.
  4. Someone who is chronically ill and impairment is considered to be lengthy in nature.
  5. Someone who is disabled whose disability is either expected to result in death or be of an indefinite nature.

Beneficiary designation considerations are now more important than ever in crafting an effective estate plan, especially if you name an Eligible Designated Beneficiary for your IRA Accounts.

We are available if you have any questions.

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