Protecting Your Wealth One Piece At A Time

Stilled confused about rules for stretch IRA’s?

On Behalf of | Jan 14, 2022 | Estate Planning |

Estate planning is complex enough for residents of Nevada and across the country without ever-changing estate tax laws and their applications to gift-giving. Responsibly securing gifts meant for your loved ones can also involve maneuvering estate assets to preserve your legacy.

Not all recent changes are advantageous for gifting and estate taxation, and in fact recent modifications are targeting how beneficiaries can access their inherited IRAs. Estate planners in Las Vegas may be wise to examine all aspects of these laws before planning for the future.

What is a “stretch IRA”?

Before tax laws changed in 2019, when someone gifted their children an IRA account, the beneficiaries and their non-spouse family could withdraw funds over the course of a lifetime with required minimum distributions (RMDs). For beneficiaries who chose this option, the IRS would provide a timetable for RMDs based on the age and life expectancy of the beneficiary.

While this is still applicable depending on the death date of the IRA owner, it is still cause for much confusion among beneficiaries who are not sure if the rules regarding RMDs apply to them. Unfortunately, this uncertainty can be cause for hefty fines.

What are the new rules, and how do they apply to me?

New regulations on how beneficiaries may withdraw funds from the account of a decedent became law with the SECURE Act of 2019. Now, children or non-spouse beneficiaries must deplete funds from an inherited IRA account within 10 years of their relative’s passing or face up to a 50% penalty tax on the amount remaining. This applies to any account whose owner passed away after January 1, 2020.

Under the 10-year rule, the value of the account must be at zero by December 31 of the tenth anniversary of the owner’s death. This date applies even if the death occurred in January of the first year counted. However, for any case involving the death of the IRA owner prior to January 1, 2020, the old rules apply.

Exceptions to these rules include disabled beneficiaries, those who were less than 10 years younger than the decedent, and minor beneficiaries whose 10-year payout will only begin when they reach the age of majority.

Spouses may still take RMDs, but they may choose to remain a beneficiary on the account or become the owner of the IRA, which will delay when they must begin taking RMDs. They could also roll the funds into an existing IRA. Either way, spouses should be wary of penalty taxes if they fail to fulfill any RMD owed by the deceased or withdraw before the age of 59 ½.