How does the SECURE Act impact IRA beneficiaries?

The SECURE Act changed how beneficiaries inherit retirement accounts, affecting distribution timelines and tax obligations. If you inherit a retirement account, understanding these rules can help you plan wisely. Florida residents should also consider state-specific estate laws when managing inherited assets.

Elimination of the stretch IRA

Before the SECURE Act, non-spouse beneficiaries could stretch required minimum distributions (RMDs) over their lifetime. This allowed for long-term tax deferral. Now, most non-spouse beneficiaries must withdraw all funds within ten years. This rule increases tax liability, as larger withdrawals can push you into a higher tax bracket. Spouses and certain eligible individuals, such as minor children and disabled beneficiaries, may still qualify for the previous stretch IRA rules.

Tax implications of the 10-year rule

The 10-year rule means non-spouse beneficiaries have flexibility in how they withdraw funds. You can take distributions at any time, as long as the account is empty by the tenth year. This flexibility allows for strategic tax planning, such as withdrawing funds during lower-income years. However, failing to withdraw the full amount by the deadline results in a 50% penalty on the remaining balance.

Special considerations for Florida residents

Florida does not have a state income tax, which benefits beneficiaries inheriting retirement accounts. However, federal taxes still apply, and large distributions may affect Social Security benefits or Medicare premiums. Estate planning tools, like trusts, must also be reviewed, as the SECURE Act changes how trusts handle retirement account distributions. 

If a trust is named as a beneficiary, it must comply with the 10-year rule unless the beneficiary is an eligible designated beneficiary.

Planning for the new rules

Understanding how the SECURE Act affects your inheritance can help you minimize tax burdens. Reviewing estate plans regularly ensures compliance with the latest laws and maximizes financial benefits.