The U.S. House of Representatives has recently passed the “SECURE” Act and it’s expected to soon be approved by the Senate and signed into law by the President. This new law will enhance the ability of workers to set aside, on a tax-advantaged basis, more money to fund their retirement. Good news! However, also buried in the Bill is a little-known provision that will accelerate and increase the taxation of inherited IRAs - - in order to pay for these new worker benefits! Not so good news!
“Stretchout” Will Be Severely Limited
Currently, when an IRA (or employer retirement plans which may be rolled into IRAs) are inherited by a non-spouse beneficiary, such as a child, that child can defer or “stretchout” the taxable required maximum distributions over that child’s lifetime. This is a huge benefit to the child and his or her family. The ability to compound money tax-deferred inside an inherited IRA for a long period of time may result in a much larger retirement fund being available later in life. Unfortunately, this stretchout rule will dramatically change under the SECURE Act.
Instead of a non-spouse beneficiary being able to stretchout required minimum distributions over his or her lifetime, these will have to, in most cases, come out of the inherited IRA by the 10th anniversary of the original IRA owner’s death. In other words, the new stretchout period will only be 10 years versus 30, 40 or more years! Not only will significant tax-deferral (and tax-free compounding inside the IRA) be lost, but since a much larger amount will be forced to come out of the IRA quickly, those distributions probably will be income taxed at much higher rates!
