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The recently enacted SECURE Act eliminated the ability for a beneficiary to stretch an inheritance over their lifetime, if the inheritance is coming from retirement savings such as a Traditional IRA, Roth IRA, or Employer Plans such as a 401(K).

Previous to the SECURE Act, beneficiaries that inherited retirement savings could roll that into an “Inherited IRA” and take the required minimum distributions over their lifetime. Now, they must take all of the money out within 10 years of the account holder passing away. There are no required minimum distributions that have to be taken, but the account has to be empty after 10 years.

When the beneficiaries take this money out, they will have to pay taxes on any of the money that is in a pre-tax account and it will be taxed based on their ordinary income-tax rate at that time. This means, instead of stretching the distributions (and taxes) over their lifetime, they now have to take the money and pay the taxes within 10 years.

Exceptions To The Inheritance Changes in the SECURE Act...

The information above only applies to non-spouse beneficiaries. Spouses still have the same options they had with inheritances prior to the SECURE Act. The other exception to this would be minor children. The 10 year rule wouldn’t apply to them until they reach the age of majority. The age of majority varies by state. Currently in Ohio, it defaults to age 21 unless stated otherwise in your will.

The Roth IRA Becomes Even More Appealing

The SECURE Act may make the Roth IRA even more appealing, especially for estate planning purposes.

If you are wondering what a Roth IRA is, you can read this article that we wrote detailing it.

If you are doing a great job saving, and you are currently saving exclusively into pre-tax accounts, it would be worthwhile for you to talk to a Financial Planner to see if a Roth IRA would be right for you. This is because a Roth IRA could not only be beneficial for your retirement planning but also planning for if/when you pass an inheritance on to your beneficiaries.

Since Roth IRAs are funded with money that you have already paid tax on, you don’t have to pay taxes on distributions in retirement. This also means that beneficiaries will inherit and be able to use Roth IRAs tax-free as well. As discussed above, the SECURE Act will still require the Roth IRA to be drained within 10 years of the account holder passing away but the beneficiaries will not have to pay taxes on that money. This could save your beneficiaries a lot of money in taxes.

In addition to that, Roth IRAs do not have required minimum distributions. This means, you will not be forced to take money out of Roth accounts while you are in retirement, giving you more flexibility and control of your income (and taxes) in retirement.

We recognize that everyone has specific financial planning needs, and there are exceptions to some of the things mentioned, and for that reason, we recommend that you speak to a Financial Planner about your specific situation.

We have 5 Financial Planners on our team and we would be happy to discuss the details of the SECURE Act and how it may affect your retirement planning.

Schedule a meeting with one of us here.


January 28, 2020

Amanda Sharratt

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