Since the SECURE Act became law in December 2019, there has been a lot of talk in the press that the “Stretch IRA era is over”. The “Stretch” referring to the ability of the beneficiary of an IRA to stretch out Required Minimum Distributions (RMDs) from the IRA over the beneficiary’s lifetime. It is true that the SECURE Act has changed the rules for some beneficiaries of IRAs who now have only 10 years to fully distribute the funds inside inherited IRAs. But there are notable exceptions that impact LGBTQ estate planning when it comes to choosing beneficiaries.
Why does this matter?
The reason that investors want to keep funds in IRAs for as long as possible is to take advantage of the tax-deferred growth of assets held within the accounts. Investors also want to delay having to pay income tax on distributions from traditional IRAs.
With the new 10 Year Rule, all amounts must be distributed from the IRA account by December 31 of the year that contains the 10th anniversary of the date of death of the original account holder (the “decedent”). In the interim, no distributions are required, as long as funds are out of the plan by that deadline.
Example: Joan dies in June of 2020, leaving her IRA to her adult daughter Karen. Karen must withdraw the entire IRA by December 31, 2030. Karen’s distributions could be spread over 11 taxable years, 2020–2030.
Spouse as Beneficiary
The options for spouses don’t change with the SECURE Act. Spouses still have the option of either 1) rolling the inherited IRA into their own IRA account; or 2) waiting to take RMDs from the inherited account until the decedent would have needed to begin taking RMDs of their own (age 72).
Non-Spouse Partner as Beneficiary
The key here is the age difference between the non-spouse partners. This matters because of a notable exception to the SECURE Act which allows for “individuals who are not more than 10 years younger than the decedent” (which would also include anyone older than the decedent) to continue to be able to take advantage of the stretch concept by taking RMDs over the beneficiary’s life expectancy using the Single Life Expectancy Table . This exception is important for LGBTQ estate planning for couples who are unmarried but relatively close in age.
If your partner is more than 10 years younger than you, then unfortunately they will be subject to the new SECURE Act 10-year rule (see above) for taking distributions from the IRA.
Note: If the decedent had already started taking Required Minimum Distributions from their IRA before their death, and the beneficiary is older than the decedent, the beneficiary would take distributions based on the decedent's life expectancy instead of their own. If the decedent was more than 10 years younger, they may have the option to do the same pending IRS guidance on interpretation of the SECURE Act.
Minor Children as Beneficiary
If you leave your IRA to your minor child outright, then there is a special rule that applies for these beneficiaries. Until the child reaches the “age of majority” (18 in most states), they will be able to take RMDs based on their life expectancy. This would result in the needed distributions being very minimal. After they reach the age of majority, the 10-year rule will kick in. Given that most young adults start their working years at the lower end of their career earnings, this additional income may not be an issue. It could be potentially offset by maxing out 401(k) and IRA contributions that they may not have been otherwise able to make.
Note: Trusts for the benefit of minor children that are the IRA beneficiary have complicated rules which are not covered in this post.
Other Retirement Plans
The rules and concepts regarding inherited traditional IRAs discussed in this post also apply to all IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. They also apply to employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. They also apply to inherited ROTH 401(k) and ROTH IRA accounts.
The SECURE Act changes how many people will use inherited retirement accounts in the future. This may have an even bigger impact on LGBTQ estate planning when it comes to unmarried couples who are more than 10 years apart. Beneficiary designations are an important part of any complete estate plan. If you haven’t reviewed your beneficiaries recently, now may be a good time with these changes from the SECURE Act. For further questions about your estate plan, reach out to a financial planner or estate planning attorney.