The Secure Act has changed the way in which we engage in planning for Qualified Retirement Plans (herein after referred to as “QRP”). Examples of QRPs are IRAs, 401(k)s and 403(b) plans.
First the good news: under the Secure Act, you do not have to start taking your required minimum distributions until age 72. You can also continue making contributions to an IRA with earned income regardless of your age. Earned income is income you receive from working.
Now for the bad news: upon the death of the QRP owner, individuals inheriting QRPs used to be able to withdraw the QRP over their life expectancies. The advantage of being able to withdraw the QRP over one’s life expectancy is that the QRP continues to grow tax-free as long as it is in the plan. This is a very powerful planning technique that allows individuals inheriting QRPs to enjoy lifetime payments that will stretch into their retirement. However, for most beneficiaries of inherited QRPs, this option is no longer available.
Under the Secure Act, most beneficiaries of inherited QRPs must withdraw the entire amount of the QRP by December 31 in the year of the 10th anniversary of the QRP owner’s death. The beneficiary must pay income taxes on the withdrawals. However, the QRP can be withdrawn any time during the 10 year period. Hypothetically, let us say that the individual receiving the QRP is 62 years old and planning to retire at age 66. Assuming that the individual’s income will be reduced dramatically when he retires, he may plan to start withdrawals from the QRP after he retires. As long as he withdraws all the moneys by the end of 10 years from year of the QRP owner’s death, he has complied with the Secure Act.
Another situation might be that of a college student who might consider withdrawing the QRP during the years she is in school and not earning a substantial income.
There are some exceptions to the 10 year rule:
- Spouses can still roll the QRP into their own names and withdraw the QRP over their life expectancy. However, upon the death of the spouse, the individual inheriting the QRP from the spouse must withdraw it by the end of the 10 year period.
- If one is disabled or chronically ill, she may withdraw the QRP over her life expectancy.
- Minor children may withdraw the QRP over their life expectancies. However, upon reaching the age of majority in their state (18 or 21 years of age) they must withdraw the remaining amount in the QRP within 10 years from the date they reached majority. In New York, the age of majority is 18.
- Beneficiaries who are less than 10 years younger than the plan participant may withdraw the QRP over their life expectancies.
These rules may change planning strategies for some people. For instance, parents might consider giving their entire IRAs to a disabled child (or to a supplemental needs trust on behalf of the child) because the disabled child, unlike non-disabled children, can withdraw the IRA over her life expectancy. If one is charitably inclined, it may be more advantageous to consider naming the charity as the IRA beneficiary and giving other assets to one’s children. (The charity will not pay taxes on the withdrawal of the IRA.)
The Secure Act creates a new landscape with respect to inherited QRPs. QRPs were an important contribution to the financial welfare of those who inherited them. This planning strategy has been for the most part eliminated.