The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and its successor, SECURE 2.0, have brought significant changes to retirement planning and inherited Individual Retirement Accounts (IRAs). These legislative updates aim to improve retirement savings opportunities but also introduce new challenges, particularly for those inheriting retirement accounts.

The SECURE Act of 2019: A Game-Changer for Inherited IRAs

The SECURE Act of 2019 introduced several key changes that affect inherited IRAs:

1. The 10-Year Rule: This rule requires most non-spouse beneficiaries to empty inherited IRAs within 10 years of

the original owner's death[1][3]. This change eliminated the "stretch IRA" strategy, which previously allowed beneficiaries to distribute inherited IRA funds over their lifetime.

2. Exceptions to the 10-Year Rule: Certain "eligible designated beneficiaries" can still stretch distributions over their lifetime, including:

● Surviving spouses

● Minor children of the account owner (until they reach the age of majority)

● Disabled or chronically ill individuals

● Beneficiaries not more than 10 years younger than the account owner[4]

3. Required Minimum Distributions (RMDs): The Act raised the age for required minimum distributions from 70½ to 72[1].

The Potential Tax Burden

The 10-year rule can create significant tax implications for beneficiaries:

● Compressed Distribution Timeline: Beneficiaries must withdraw the entire account balance within 10 years, potentially pushing them into higher tax brackets[3].

● Loss of Tax-Deferred Growth: The shortened distribution period reduces the potential for long-term, tax-deferred growth within the account[4].

● Impact on Other Tax Benefits: Large distributions can increase adjusted gross income, potentially affecting eligibility for certain tax credits and deductions[5].

SECURE 2.0: Further Refinements

SECURE 2.0, passed in December 2022, builds upon the original SECURE Act with additional changes:

1. RMD Age Increase: The age for required minimum distributions will increase to 73 in 2023 and to 75 in 2033[5].

2. Clarification on RMDs for Inherited IRAs: Starting in 2025, certain beneficiaries will need to take annual RMDs from inherited IRAs if the original account holder had reached their RMD age before passing[5].

3. Enhanced Spousal Benefits: Spousal beneficiaries can now elect to be treated as the original employee for RMD purposes, allowing for more advantageous RMD calculations[4].

Strategies to Mitigate Tax Impact

To manage the potential tax burden of an inherited IRA:

1. Spread Distributions: Consider taking distributions evenly over the 10-year period to smooth out the tax impact[4].

2. Strategic Asset Allocation: If possible, hold assets with lower growth potential in the inherited IRA and higher growth potential assets in other accounts[4].

3. Consult a Professional: Work with a financial advisor or tax professional to develop a personalized strategy that aligns with your overall financial plan.

The SECURE Act and SECURE 2.0 have significantly altered the landscape of retirement planning and inherited IRAs. While these changes aim to enhance retirement savings opportunities, they also present new challenges, particularly in tax management for beneficiaries. Understanding these changes and planning accordingly is crucial for both account owners and potential beneficiaries.

Remember, individual circumstances vary, and tax laws can be complex. It's always advisable to consult with qualified financial and tax professionals when making decisions about inherited IRAs and retirement planning. We are here to help so if you have any questions, please contact our office to schedule a call or appointment.

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This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. The sources used to preparethis material are believed to be true, accurate and reliable, but are not guaranteed.

Citations:

[1] https://www.kiplinger.com/taxes/inherited-ira-four-things-beneficiaries-should-know

[2] https://giving.wustl.edu/implications-of-inherited-iras/

[3] https://anderscpa.com/inherited-ira-10-year-rule-rmds-irs-clarifies/

[4] https://www.fidelity.com/learning-center/personal-finance/retirement/secure-act-inherited-iras

[5] https://www.cnbc.com/2024/09/17/reduce-taxes-inherited-individual-retirement-accounts.html

[6] https://www.investopedia.com/inherited-ira-rules-for-beneficiaries-8661569

[7] https://www.bankrate.com/retirement/inherited-ira-rules/

[8] https://www.schwab.com/learn/story/inherited-ira-rules-secure-act-20-changes

[9] https://www.kitces.com/blog/rmd-spousal-election-secure-2-0-secure-act-rmd-rules-spousal-beneficiaries-retirement-account/

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Investment advisory and financial planning services are offered through Simplicity Wealth, LLC, an SEC-registered investment adviser. SEC registration does not constitute an endorsement of the firm nor does it indicate that the adviser has attained a particular level of skill or ability. Insurance, Consulting and Education services offered through Hux Capital Management LLC. Hux Capital Management LLC is a separate and unaffiliated entity from Simplicity Wealth. Please also add: This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives.