Planning ahead involves not only providing for yourself in retirement, but also taking care of your loved ones when you are no longer there. With so many changes in tax laws taking place in recent years, estate planning in New York and elsewhere is an involved process that can take some maneuvering in order to preserve a legacy for the future.
Although some laws have benefitted gifting and estate taxation, more recent changes are limiting how non-spouse beneficiaries may access inherited IRAs. For residents of Nassau and Suffolk counties, it is important to understand the tax implications of these new laws so that they can begin planning ahead.
The “stretch” IRA
Under the old IRS rules, when an individual named their children as beneficiaries of an IRA account such as a 403(b) or 401(k), those or other non-spouse family members could spread out the withdrawal of required minimum distributions over the course of a lifetime.
This kind of legacy was called a “stretch” IRA. Beneficiaries could choose this option, as the IRS provided a timetable for required minimum distributions based on the age and estimated life expectancy of the beneficiary.
New rules, new planning
In 2019, new regulations changes how beneficiaries may access the accounts of a decedent who passed away after January 1, 2020. Now, children or other non-spouse beneficiaries have to deplete the inheritance by the end of the tenth year of their relative’s passing. Otherwise, the IRS will impose a 50% penalty tax on the amount remaining.
Under the new rules, even if a beneficiary chooses to spread out distributions over ten years, and depending on the yearly amount, the tax rate on the withdrawal could skyrocket, possibly jumping from 12% to 22% or more.
There are exceptions to the new regulations for disabled beneficiaries, those who are less than ten years younger than the decedent, and minor beneficiaries whose ten-year payout only begins when they reach adulthood.
Spouses may still take RMDs, but they should also fulfill any RMD the deceased owed in the IRA to avoid a 50% penalty on the remainder. They can also choose to remain a beneficiary on the account, which will delay the requirement that they begin taking RMDs.
Other options for spousal beneficiaries are to become the owner of the IRA, again delaying the necessity to begin RMDs, or rolling over the money into an existing IRA. For the surviving spouse who is under 59 ½ years of age, it is important to remember that there is a 10% penalty for early withdrawals.