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Planning Around 10-Year Withdrawal Requirements from Inherited IRAs by Jeffrey M. Mutnik, CPA/PFS


Posted on June 15, 2021 by Jeffrey Mutnik

The 2019 Setting Every Community Up for Retirement Enhancement Act (SECURE Act) killed off a popular estate-planning strategy that had allowed IRA owners to pass retirement savings tax-free to their heirs and provide beneficiaries with tax-deferred growth and distribution payments over their lifetimes. Under the new law, however, non-spouse IRA beneficiaries must withdraw the entirety of those inherited IRA balances within 10 years of the original owner’s death. Not only does this burden your heirs with income-tax liabilities, it also has the potential to bump them into higher tax brackets.

Ongoing estate planning has always helped individuals achieve their wealth accumulation and preservation goals while minimize their exposure to often-changing tax laws. The elimination of stretch IRAs is no different. Following are some strategies you may consider under the guidance of your trusted financial advisors and CPAs to determine which one may work best for you and your family’s unique circumstances.

Roth IRA Conversions 

With tax rates currently at historically low levels, now may be a good time to consider converting a traditional IRA to a Roth IRA and immediately paying tax on the transferred amount. In doing so, you and your named beneficiaries can enjoy the benefit of tax-free withdrawals in the future, since withdrawals taken from Roths are not subject to tax as long as you are age 59½ or older and have owned the account for a minimum of five years.

While the immediate tax liability of a Roth conversion may be substantial, it is likely to be less than the amount of tax you or your heirs will pay in the future on annual required minimum distributions (RMDs) from traditional IRAs at potentially higher tax rates. There are no RMDs with Roth IRAs. However, it is important to remember that the tax liabilities you incur taking RMDs from a traditional IRA during your lifetime may also help to reduce the size of your taxable estate and your family’s exposure to estate taxes in the future. This can be a valuable benefit as the government reduces the estate tax exemption, and more families become subject to estate tax.

Divide IRA Assets Strategically Among Several Beneficiaries 

Rather than leaving all your IRA assets to one or two beneficiaries who risk exposure to the 10-year withdrawal rules (and a potentially higher tax bracket), consider divvying up your savings among a larger group of beneficiaries. This will enable you to share your wealth and leave behind the legacy you intend, potentially without saddling your heirs with substantial tax bills.

Donate IRA Assets to Charity 

Naming a charity as the beneficiary of your IRA or creating a charitable remainder trust (CRT) or charitable lead trust (CLT) to receive your accumulating retirement savings after your passing generally escapes the stretch IRA limitations and related tax liabilities on your heirs. In fact, with a CRT, you can name your heirs as beneficiaries to receive distributions from the trust. Moreover, you do not need to wait until your death to be charitable with an IRA. Under U.S. tax laws, you may donate your annual RMDs to a qualified charity after you reach age 72, thereby reducing the size of your taxable estate and the tax liabilities passed to beneficiaries who inherit your IRA account.

Buy a Cash-Value Life Insurance Policy 

A cash-value life insurance policy funded with IRA withdrawals will reduce the taxable value of your IRA account while enabling you to continue saving for retirement and providing your heirs with a tax-free, lump-sum death benefit at the time of your passing. Your ability to fund a cash-value policy with your IRA assets depends on your age and the value of your estate.

It is important to remember that passing an IRA of substantial size to non-spouse beneficiaries under the SECURE Act’s 10-year distribution rule can not only have a significant impact on their tax liabilities. It can also affect their unique financial planning needs and longer-term retirement savings goals. Ongoing estate planning is the best way to ensure you leave your heirs with a lasting legacy that also maximizes tax efficiency.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.