Inheriting IRA's Post Secure Act

John and Mary Smith were a married couple in their late 60s, planning for a comfortable retirement and leaving a legacy for their two adult children, Alex and Emily. John had amassed a significant retirement savings portfolio, including a traditional IRA valued at $1,600,000 at the time of his passing. The couple’s financial plan involved ensuring that their assets would be efficiently transferred to their heirs while minimizing tax liabilities.

In 2022, John passed away unexpectedly. As the primary beneficiary, Mary was faced with important decisions regarding John's IRA. The SECURE Act, enacted in December 2019, introduced significant changes to the rules governing inherited IRAs, affecting how beneficiaries can withdraw funds from these accounts.

Key Players

• John Smith (Deceased): Account owner of the traditional IRA.
• Mary Smith: Surviving spouse and primary beneficiary of John's IRA.
• Alex Smith: Adult son and secondary beneficiary.
• Emily Smith: Adult daughter and secondary beneficiary.

The SECURE Act and Its Implications

The SECURE Act altered the rules surrounding inherited IRAs, particularly concerning the "stretch IRA" strategy, which allowed beneficiaries to take required minimum distributions (RMDs) over their life expectancy. Under the new rules, most non-spouse beneficiaries must withdraw the entire balance of the inherited IRA within 10 years of the account owner's death.

However, the SECURE Act also provides different options for surviving spouses, which Mary could leverage in her decisions regarding the inherited IRA.

Decision-Making Process

1. Immediate Options for Mary (Surviving Spouse)

As the primary beneficiary, Mary had several options concerning the inherited IRA:

• Roll Over to Her Own IRA: Mary could choose to roll over John's traditional IRA into her own IRA. This option would allow her to treat the account as her own, meaning she would not be required to take RMDs until she turns 73 (the new age for RMDs under the SECURE Act).
   
• Retain the Inherited IRA: If Mary chose to keep the IRA as an inherited account, she would need to take RMDs based on her life expectancy, but she also had the option to withdraw all the funds within the 10-year period without being subject to annual RMDs.

2. Considerations for Alex and Emily (Children)

Since Alex and Emily were designated as contingent beneficiaries, they would inherit John's IRA if Mary chose to disclaim her interest or after her death. Under the SECURE Act, as non-spouse beneficiaries, they would need to withdraw the funds within 10 years of John's death.

The Family’s Decisions

After consulting with a financial advisor, Mary decided to roll over John's traditional IRA into her own IRA. This decision allowed her to defer taxes on the account while also giving her greater flexibility in managing the funds.

Mary informed Alex and Emily of her decision and emphasized the importance of planning for their own future financial needs.

For Alex and Emily, the advisor explained that once their mother passes away or if she disclaims the inherited IRA, they will have to withdraw the entire balance within 10 years. The advisor helped them understand that they would not face annual RMDs, but they should consider tax implications based on their income levels and how much they withdraw each year.

Tax Implications and Planning

1. Mary's Rollover: By rolling over the inherited IRA into her own IRA, Mary could defer taxes until she withdrew funds. Since she had no immediate plans to retire, she decided to leave the funds invested for future growth.
    
2. Future Distributions for Alex and Emily: Once Mary passes away or if she decides to pass on the inherited IRA, Alex and Emily would need to be strategic about withdrawals. The advisor suggested the following strategies:
   • Lump-Sum Withdrawal: They could withdraw the entire amount in a single year, which could push them into a higher tax bracket.
   • Strategic Withdrawals: By withdrawing smaller amounts over several years, they could manage their taxable income more effectively and avoid a higher tax burden.
      
3. Estate Planning: The family revisited their estate planning documents, ensuring that they accounted for the potential inheritance and how it would fit into their overall financial goals.

Outcome

By taking proactive steps, Mary was able to manage the inherited IRA effectively, allowing her to maintain control over the funds while considering the tax implications for herself and her children. Alex and Emily were educated about the SECURE Act's impact on their inheritance, enabling them to plan strategically for the future.

As a result, the family was well-positioned to navigate the complexities of inherited IRAs, minimizing their tax burden and maximizing their financial legacy.

Conclusion

This case study highlights the importance of understanding the SECURE Act and its implications for inherited IRAs. By engaging with a financial advisor, Mary, Alex, and Emily made informed decisions that aligned with their financial goals and obligations. Annual reviews and discussions about these topics are essential to ensure that families can adapt to changing regulations and manage their wealth effectively across generations.

Disclosures: 

“This case study is provided for illustrative purposes only to provide an example of the firm’s process and methodology. The results portrayed in this case study are not representative of all client situations or experiences. An individual’s experience may vary based on his or her individual circumstances and there can be no assurance that the firm will be able to achieve similar results in comparable situations. No portion of this case study is to be interpreted as a testimonial or endorsement of the firm’s investment advisory services. The information contained herein should not be construed as personalized investment advice.”

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“This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.”

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