As you know, as of January 1, 2020, non-spousal IRA beneficiaries lost their ability to stretch their required minimum distributions over their own lifetimes.
Under the Secure Act, distributions to non-spousal beneficiaries are required by the end of the 10th calendar year following the year of the death. The rule does not apply to surviving spouses of the participant or IRA owner, disabled or chronically ill beneficiaries, beneficiaries who are not more than 10 years younger than the participant or IRA owner, or to children of the participant or IRA owner who have not reached the age of majority.
However, those beyond the excluded group have lost a tremendous benefit.
As a hypothetical example, a child, age 38, inheriting a $750,000 IRA from a parent who died before December 31, 2019 could stretch the IRA based on their lifetime. At a 6% average rate of return, that child would have received over $1 million of annual RMD distribution by the time they were age 65 and would still have just over $1.5 million in the inherited IRA account.
By age 85, they would have received almost $3.4 million in annual RMD distributions and the inherited IRA would have had a value of over $1 million.
This is why it is important that if your married client died in 2019 and the surviving spouse has not yet rolled the IRA into theirs, and they do not need the money, you should evaluate having them disclaim the inherited IRA.
If instead, in the above circumstance, the spouse rolls it over into their IRA and then dies in 2020 or after, the children will be subject to the 10-year RMD rule at what will likely be higher tax rates compared to stretching the IRA under their life expectancy.
By disclaiming the IRA, it would allow the children to receive a valuable benefit that became extinct after December 31, 2019.
Please feel free to share this article with other Financial Advisors. This important strategy has not gotten as much press as it should, and time is running out.
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