New tax rules in secure act to affect ira fund beneficiaries

iStock / Getty Images En español | Starting this month, IRA expert Ed Slott is taking your questions about Individual Retirement Accounts. He starts by addressing what to do about new rules

in the 2020 SECURE Act that  affect most beneficiaries who inherit tax-deferred funds starting this year. I'm going to assume you mean that you are the IRA owner and you are referring

to setting up your IRA so that your beneficiaries can take advantage of the stretch IRA. (If you are the beneficiary, the SECURE Act has no effect on you since the section that eliminated

the stretch IRA applies only to those who inherit in 2020 or later.) LET'S START BY EXPLAINING WHAT THE STRETCH IRA IS AND WHAT CHANGED. The stretch IRA is a made-up term (it's not

mentioned anywhere in the tax code) to describe the ability of IRA beneficiaries to stretch distributions from an inherited IRA over their lifetimes. For example, a 30-year-old beneficiary

would be allowed to stretch distributions over 53.3 years, according to IRS life expectancy tables that govern this. ASK ED SLOTT Confused about IRAs, 401(k)s, Roths, taxes and more related

to saving for retirement? Ed has the answers. Email your questions to [email protected]. That's a huge advantage for the beneficiary. In the above example, the 30-year-old would begin by

withdrawing only 1/53.3th (roughly 1.8 percent) of the total account value as of Dec. 31 of the prior year. That's a very small amount, so the account can keep growing despite the

withdrawals. Each year the size of the required minimum distribution (RMD) will increase slightly until the end of the 53.3 years, when the full balance must be withdrawn. The beneficiary,

however, can always take more than the RMD. That is the basic stretch IRA concept. To qualify, the beneficiary had to be named on the IRA or plan beneficiary form and the beneficiary had to

be a person, as opposed to an estate, charity or some trusts. (These nonperson beneficiaries have no life expectancy, so they cannot use the stretch provision.) This beneficiary in tax

parlance is known as a designated beneficiary, and only a designated beneficiary can do the stretch IRA. Unfortunately, the SECURE Act did away with this for most people who inherit in 2020

or later and replaced it with a 10-year payout provision for most non-spouse beneficiaries. However, the SECURE Act carves out exceptions by creating a new class of designated beneficiaries

now called eligible designated beneficiaries, or EDBs.  ELIGIBLE DESIGNATED BENEFICIARIES * SPOUSES * MINOR CHILDREN: * Up to the age of majority — but not grandchildren * Although the

10-year rule applies when the child does reach the age of majority (or age 26 if still in school) * PEOPLE WITH DISABILITIES * CHRONICALLY ILL INDIVIDUALS * PLUS * Individuals who are not

more than 10 years younger than the IRA owner (for example, a partner, friend, sibling, etc.) * Any designated beneficiary (including qualifying trusts) who inherited before 2020. These

beneficiaries are grandfathered under the pre-2020 stretch IRA rules. LOSING THE STRETCH IRA MAY NOT BE AS TERRIBLE AS YOU THINK. Remember that this affects only your beneficiaries, not you,

so it depends on how much you leave them. If you have a very large IRA, say $500,000 or more, then yes, any amount left to your non-spouse beneficiary will have to be withdrawn within the

10 years after your death, and that could mean a significant tax bill for your heirs. But even that can be managed, since the new law did away with RMDs each year. You don't have to

make any RMDs during the 10 years, except that at the end of the 10th year after death, the entire inherited IRA must be withdrawn and will be taxed at that time. Your beneficiaries have

great flexibility during those 10 years to withdraw more funds when their income is lower, and withdraw less — or even nothing — in high-income years. For instance, if your beneficiary

inherits five years before she is to retire, she could withdraw nothing during those working years and then start withdrawing over the last five years when her income and tax rate should be

lower. That kind of planning can help minimize the tax. In addition, if you have more than one beneficiary, each beneficiary can use their own lower tax brackets over the 10 years, allowing

them to minimize the overall tax paid by the beneficiaries, lessening the impact of the stretch IRA loss. YOU CAN ALSO DO SOME THINGS TO MINIMIZE THE TAX IMPACT FOR YOUR BENEFICIARIES. You

can convert some of your IRA to a Roth IRA — a little at a time over several years, so you can keep your income from creeping into a higher bracket. Your beneficiaries will still be stuck

with the 10-year rule after death, but at least there will be no tax on amounts they withdraw, so all the income accrued while in the Roth will be tax-free to them. Another way to bring down

your taxable IRA balance during your lifetime is to take advantage of qualified charitable distributions (QCDs). QCDs allow you to make charitable contributions through direct transfers

from your IRA. Those IRA withdrawals are excluded from your income, lessening the tax impact for both you and your beneficiaries. QCDs can also go toward satisfying your annual RMDs, so this

is a big tax benefit. If you normally give to charity, do it this way and save the taxes, especially since most people no longer get to deduct their charitable contributions because they

use the standard deduction instead. QCDs can be used only by IRA owners or beneficiaries who are age 70-1/2 or older. Even though the age for RMDs was changed to age 72, the age for QCDs

remains at 70-1/2. If an IRA is not as large and will mostly be consumed during your lifetime for living expenses, then there won't be much of a tax issue for your beneficiaries anyway,

and the loss of the stretch IRA may not be an issue at all. If you have a larger IRA with more funds likely to go to beneficiaries, these strategies will lessen the impact. _Ed Slott, CPA,

is one of the nation's top experts on retirement plans. For more than 30 years, he has educated both consumers and financial advisors on retirement tax-saving strategies. Most recently,

he published _Ed Slott's Retirement Decisions Guide: 2020 Edition_ and is the host of several popular public television specials, including his latest, _Retire Safe & Secure! With

Ed Slott_. Visit www.IRAHelp.com to learn more._ MORE ON SECURING YOUR FINANCIAL FUTURE * Make sure your heirs get the cash you want them to have * Do's and don'ts starting day one

of your retirement * 4 Steps to make your money last a lifetime