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EXCEPTIONS TO THE NEW RULE ON INHERITED IRAS

 

Yet another new tax reform law went into effect in 2020 under the SECURE Act.  In addition to ultra-high-net-worth individuals, the many millions of mass affluent Americans are likely to be impacted by the 470-page SECURE Act's retirement income tax provisions.  The SECURE Act is a sweeping and substantive effort to make retirement income tax more sensible, a rare legislative action to win bipartisan support in Congress and the president's signature.

 

The new rules force heirs to withdraw everything from an inherited IRA over 10 years. Requiring heirs to deplete an inherited IRA over 10 years is a tax hike.  IRA beneficiaries are no longer allowed to stretch out withdrawals over their expected lifespan.

 

Forcing heirs to pay tax on required distributions from an IRA over 10 years may result in heirs paying additional income taxes annually during the 10-year withdrawal period.  However, there are exceptions to the new 10-year rule for certain beneficiaries.

 

Spouses.  Spouses can inherit one’s IRA with zero tax impact.  A spouse who inherits an IRA is required to make withdrawals based on their actuarial life expectancy, which can be found in a table published by the IRS.  Starting in 2020, a spouse who inherits an IRA may defer taking required minimum distributions (RMDs) until age 72 — not age 70½, as under the old law.  An extra 18 months of tax deferral is significant.  Deferring taxes for 18 months, when the IRA is hitting its peak value, lengthens the period of tax-free compounding just when a pre-retiree needs it.  The stock market averaged a 3.9% quarterly return in the six quarters ended December 31st, 2019, despite a -13.5% in the fourth quarter of 2019, and no one can predict stock returns.

 

Minor Children of an Employee.  Minor children of an employee who inherit a federally qualified retirement account, such as a 401(k), are exempt from the 10-year distribution rule.  As long as the parent was an employee with a company's 401(k) plan, the child is not required to make distributions over 10 years.

 

Disabled.  Disabled individuals who inherit an IRA are not subject to the 10-year required minimum distributions (RMDs) rule.  Thus, they are eligible to take required minimum distributions based on more favorable terms.

 

Chronically Ill.  Those suffering from a chronic illness are exempt from the 10-year rule.

 

Not 10 Years Younger.  If an heir is not more than 10 years younger than the owner of the federally qualified plan account, the 10-year distributions rule will not apply.

 

The new RMD rules in the SECURE Act affect a hodgepodge of situations, reflecting Congress’s effort to make tax laws more compassionate and sensible.  The specific situations are just one aspect of the SECURE Act’s wide-ranging effects.  For those who believe they fall into one of the above exceptions to the 10-year rule, please contact Jim Holtzman or Lou Stanasolovich at Legend Financial Advisors, Inc.® at (888) 236-5960 with questions.

 

Legend Financial Advisors, Inc.® (Legend) and/or its advisors are not income tax or estate planning advisors (attorney) nor a legal advisor (attorney).  It is Legend’s intention to merely present ideas and strategies to readers to discuss the concepts with their own tax and legal advisors or in conjunction with Legend’s advisors. 

 


 

 

Legend’s Fee-Only And Transactions Disclosure:
 

1 Legend Financial Advisors, Inc.® (Legend) is a Fee-Only Advisory Firm.  Fee-Only Means Legend Never Receives Any Commissions.

Legend’s Clients Will Not Pay (a) a Transaction Fee (also Known as a Trading Fee or Commission) for Exchange-Traded Funds (ETF’s) and/or Exchange-Traded Notes (ETN’s) as well as Exchange-Traded Equities through Virtually All Custodians that Legend Utilizes. However, Open-End Mutual Fund Trading Fees Are Charged by Custodians.

Legend will Trade Open-End Mutual Funds, Usually an Institutional Share Class, if available, on Behalf of the Client, Through a Few Non-Related Institutional Custodians.

An Institutional Share Class of an Open-End Mutual Fund is Usually the Lowest Cost Share Class with Regard to the Expenses it Charges.  Therefore, Legend Utilizes No-Load, Institutional Cost, Share Classes of Open-End Mutual Funds.

Due to its Desire to Reduce its Clients’ Investment Costs.  As a Result, Legend’s Clients Often Pay a Small Transaction Fee for Institutional Mutual Fund Trades to the Custodian (Also Known as a Trading Fee or Commission).

Legend Never Receives any Portion of Such Fees/Commissions.

(a) Please Note Certain Custodians that Legend May Use to Accommodate Certain Clients May Charge a Very Small Transaction Fee.



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