2020 Brings Dramatic Changes to Pay-out Requirements for Inherited IRAs and Retirement Plans

By Margaret Menicucci, Attorney & Counselor

The pay-out requirements for people inheriting Individual Retirement Accounts (IRAs) and other retirement plans have changed dramatically. Legislation passed in late December of 2019, called the Setting Every Community Up for Retirement Act (the “SECURE Act”), imposed a 10-year pay-out requirement for most inherited IRAs and retirement plans. Prior to the SECURE Act, when a person designated an individual (or certain trusts) as the death beneficiary of an IRA or retirement plan, the tax-deferred status of that IRA could continue for a number of years based on the beneficiary’s life expectancy. For example, if a 50-year-old inherited a parent’s IRA, generally, the required distributions from the IRA would be tied to the 50-year-old’s life expectancy, which could be over 30 years. This long-standing rule enabled the adult child to withdraw modest amounts from the IRA or retirement plan, stretching the income tax liability associated with that IRA or retirement plan over a number of years. This “stretch” allowed the beneficiary to plan for larger distributions after retirement when the beneficiary was in a lower tax bracket. The SECURE Act ends the ability to stretch an inherited IRA or retirement plan for all but a few categories of beneficiaries.

The post-death, 10-year pay-out requirement does not apply to IRAs and retirement plans passed to a surviving spouse, a disabled or chronically ill beneficiary, or a beneficiary who is less than 10 years younger than the IRA or retirement plan participant. If the IRA or retirement plan is passed to a minor beneficiary, the 10-year pay-out requirement does not apply until that beneficiary is no longer a minor. Most importantly, the 10-year payout requirement does not apply to IRAs and retirement plans that were inherited before January 1, 2020.

The SECURE Act included other helpful changes to retirement planning, including:

  • Increasing the required minimum distribution age from 70 ½ years old to 72.
  • Removing the age-cap on making contributions to a traditional IRA so long as that individual has compensation from wages or self-employment.

For many families, a retirement plan or IRA is one of the largest assets in the estate, resulting from years of disciplined savings of income. Now, when that asset is passed to adult children or adult siblings, the recipients must fully pay out the account over 10 years. Making a trust the recipient of the IRA does not change the 10-year payout requirement. At Braun & Gresham, we can assist you in evaluating your entire estate plan, including your strategies with tax-deferred accounts. Please contact us at (512) 894-5426 if you are interested in setting up a consultation.

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