![]() Generally speaking, it is common practice for spouses to name each other as the primary beneficiary of their IRAs. Spouses Are Still Able To Assume IRA Ownership Upon One Spouse’s Death Most people roll over these plans eventually into self-directed IRAs. This would include all defined contribution plans including 401(k), 403(b), 457(b), 401(a), ESOP, Cash Balance Plans, Profit-sharing plans, and lump-sum distributions from defined benefit plans. The 10-year rule applies to all qualified plans with balances. The New Rule Applies To ALL Qualified Plans (like 401ks), not just IRAs. If a qualified plan or IRA owner fails to name a beneficiary or if the named beneficiary does not survive the owner, the IRA will go to the decedent’s estate, and be subject to probate and payout within 5-years. One key point is to make sure your IRA or qualified plan is kept up to date if your primary and secondary beneficiaries pass away before you do. Failure to name individual beneficiaries formerly resulted in the imposition of a Five Year Rule which forced all IRA balances to be distributed within 5 years of the death of the IRA owner. Alert IRA owners with living trusts sat down with their attorneys alter or restate their trust to include a ‘look-through’ provision to allow the IRA to be distributed through the trust, while preserving stretch IRA benefits. Naming a Revocable Living Trust as the beneficiary resulted in the RMD being based on the age of the oldest living beneficiary, which was a complication and not always optimal. The beneficiary would then simply take distributions under the Required Minimum Distribution (RMD) rules based on their age. More than ever before, it is important to meet with a qualified estate planning attorney and a CPA to review how your estate and tax planning ideas will be impacted by the SECURE Act.Įstate planning for IRAs before the SECURE Act(current law) revolved around naming individual IRA beneficiaries with the intent of creating an inherited IRA for each of them. ![]() ![]() A disabled beneficiary or a chronically-ill beneficiary, may also have different treatment. At that point, they must take distributions under the 10-year rule. There are exceptions to the 10-year rule, including:Ī spouse may roll over the decedent’s IRA to his or her own IRA and stretch the distribution over their lifetimeĬhildren under the age of majority would not start the clock until attaining majority. The old five year rule is gone, and the non-spouse stretch is pretty much gone. For most beneficiaries going forward, the ‘stretch’ rules would be eliminated and the beneficiary must withdraw the entire IRA balance within 10 years of the death of the IRA’s owner. The SECURE Act, once passed, would change all that. To sidestep that problem, many IRA owners created ‘IRA Conduit Trusts’ with the help of their attorneys to make sure beneficiaries could take only the Required Minimum Distributions and assets in the IRA would remain protected. What the advisors often left out at the steak dinner workshops was that inherited IRAs can be subject to the claims of the beneficiary’s creditors. The Stretch IRA was promoted as a way to enrich next generations with lifetime income (courtesy of you) after you have passed. The “Stretch IRA” idea has been popularized by many advisors and journalists over the years. This avoided a potentially large tax hit from a lump sum. ![]() For example, under the old (and still current) rules, if Jane was the owner of a $1 million IRA and left it to her 30-year-old grandson Ryan, Ryan could have stretched the distributions over his life expectancy of 52.1 years. Under the previous rules, non-spouse beneficiaries could ‘stretch’ their IRA distributions to enjoy major income tax savings. The SECURE Act is expected to pass the Senate by unanimous consent (if they ever get back to working again to pass meaningful legislation.) So, it is not yet law, but if you are an IRA or qualified plan owner, you need to be aware of how it might affect your estate planning decisions going forward. The law is known by its initials, the SECURE Act. The House of Representatives has passed a new bill with a 417-3 vote, entitled “The Setting Every Community Up for Retirement Enhancement Act of 2019”. Unless your trust is specifically worded using what is known as a “conduit provision”, the trust may be a poor choice for an IRA, 401k, 403b, or TSP beneficiary. Even before new laws were proposed, the idea was problematic. Many people own revocable living trusts and consider the idea of making their trust the beneficiary of their IRA. ![]()
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