N/A | May 02, 2022

Once upon a time, IRA distributions were relatively straightforward. Retirees would take distributions based on their life expectancy and that of their primary beneficiary. Distributions would have to begin no later than age 70-1/2, a number etched into our brains. Surviving spouses of deceased IRA owners could roll the IRA into their own. Non-spouse beneficiaries had the option to take distributions over their own life expectancies (so-called “stretch IRAs”). The only noticeable change to distribution rules occurred in 2006 when Congress began allowing charitable contributions directly from IRAs. With that one exception, IRA rules changed very little for decades, until recently.

Beginning in 2020, the SECURE Act introduced a number of changes. The most noticeable change was that the government now incorporated longer life expectancies into IRA distribution schedules, allowing RMDs to begin the year the IRA owner turns 72. Other favorable changes ushered in by this law included allowing employees age 70-1/2 and older to contribute to IRAs, and making part-time employees eligible to participate in 401k plans if they work at least 500 hours for three straight years (versus 1,000 previously).

However, that’s where the good news ends. Congress enacted a way to pay for the goodies in the SECURE Act by taking away “stretch IRAs.” Traditional and Roth IRAs must be emptied by the end of the tenth calendar year following the IRA owner’s death. Under the Act, the old rules would still apply to surviving spouses, minor children, the disabled, and non-spouse beneficiaries no more than ten years younger than the IRA owner.

This upended the estate plans of many investors. It was particularly angering to those who paid taxes to convert to a Roth with the promise of decades of tax-free growth and distributions even following their death. But at least beneficiaries had the flexibility to choose when to take distributions as long as the IRA was empty after the tenth year.

Hopefully you are sitting down because the news is about to get worse. The IRS has decided Congress didn’t mean that you could choose the timing of the full IRA distribution. Under its proposed rule, investors with inherited IRAs would now have ten years to completely empty the IRA, but with a minimum distribution required in each year.

I don’t know if Provident’s experience is typical, but 72% of our clients with inherited IRAs are younger than Social Security’s full retirement age with a median age of 57.5 years. This means most of them will be forced to take distributions from retirement plans before they are retired. Let that irony sink in for a moment. Rather than using the inherited IRA to help fund their retirement, presumably at a lower tax rate, they will have to withdraw funds while still working. These withdrawals will be taxed on top of their salaries, presumably at a higher rate.

Even if you’re not particularly bothered by this change, you should be after reading the following: