12 Mar 20200 Comments
Beginning 2020, the “Secure Act” changes how beneficiaries may take distributions from qualified retirement accounts like IRAs and 401(k) plans. Participants may now start required minimum distributions at age 72 (not at 70 ½, as previously allowed), but rules for some beneficiaries are different than in the past.
The big change is that IRA stretch payouts (payable over life expectancy) are now only available to “eligible designated beneficiaries.” These include: (1) the surviving spouse of the participant; (2) a minor child of the participant; (3) a disabled beneficiary; (4) a chronically ill beneficiary; or (5) an individual who is not more than 10 years younger than the participant.
A 10-year payout replaces life expectancy payouts for other beneficiaries. There are no required minimum distributions during the 10-year period, so you can wait to the last day of the tenth year to take it all out. Beware the tax bill though!
Here’s an example of the change. Let’s say Mom, a widow, leaves her IRA to her 50-year-old son who has a life expectancy of 34.2 years. Under the prior rules, the son could receive his tax-deferred stretch payout until he was past 80 years old. The new rules require him to take the full amount out by the end of 10 years, when he is 60.
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Life expectancy payouts were often a good way to protect against a child’s imprudence. Even if benefits are left to a child or grandchild in trust, the 10-year rule applies. Charitable remainder trusts holding IRAs will still work, but distributions of IRA benefits to non-qualifying individuals must still be made within 10 years.
The 10-year cap also applies to beneficiaries of Roth IRAs. While Roth contributions can be made at any age, prior law capped contributions to traditional IRAs at age 70 ½. The new law removes the cap.
All estate plans and beneficiary designations should be reviewed in light of Secure Act changes. Individuals who have no IRAs, or leave them all to charity, may be the only people not affected by the law change.