04 Mar Can we get around the SECURE Act rules for inherited IRAs?
Q. I am devastated by the rule changes to Inherited IRAs. My husband and I have dedicated our working lives to leave sizable legacies to our daughters and their families. With the accelerated distribution requirements, they will end up with huge tax liabilities and our hopes for their futures severely diminished. What can we do to work around this new law?
A. You’re correct in saying that the SECURE Act changed the treatment of inherited IRA distributions.
Non-spouse beneficiaries must now take the funds out within 10 years, and yes, the funds will take a tax hit.
There’s no real workaround to change how inherited IRAs will be treated under the new law, but there are some strategies that can help — a little.
First, talk to your beneficiaries about the 10-year distribution window, Nicholas Scheibner, a certified financial planner with Baron Financial Group in Fair Lawn.
Beneficiaries don’t have to take funds out every year, so they can work with their tax planners to determine the smartest time to take the distributions. They could take it all out in the final year, thereby allowing the funds inside the account to grow tax-deferred.
Next, you should talk to your advisors about Roth IRA conversions, Scheibner said.
He said a Roth IRA is a great estate planning tool as any distributions from the accounts will be tax-free.
Once you retire, you may find yourself in a lower tax bracket. This is especially true if you retire before age 72, and before Required Minimum Distributions (RMDs) are required,” Scheibner said. “There may be a window of time where you can maximize the Roth-conversion strategy, before your taxable income potentially goes up due to RMDs.”
Finally, you should look at which accounts you use now to fund your own retirement needs.
The SECURE Act did not affect non-retirement accounts, which means the step-up in basis rule still applies for appreciated securities in a brokerage account, he said.
“If your main goal is to pass on assets to your children in the most tax-efficient way, bequeathing investments with a large capital gain allows your children to inherit those investments with a date-of-death-cost basis,” he said. “If you are currently using a brokerage account to fund your retirement goals, work with your advisors to analyze the option of using a portion of your IRA instead.”
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This story was originally published March 4, 2020.
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