How the SECURE Act will change IRA treatment

By Robert Hilton, Esq.
Posted 8/25/19

There is currently more than $25,000,000,000,000 in IRA money that has yet to be taxed. We know the federal government both needs and wants the taxes off of that money. The SECURE Act (Setting Every …

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How the SECURE Act will change IRA treatment

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There is currently more than $25,000,000,000,000 in IRA money that has yet to be taxed.

We know the federal government both needs and wants the taxes off of that money. The SECURE Act (Setting Every Community up For Retirement) is Congress’ answer to that very issue. While intended to create a better retirement opportunity for many, it has tax consequences in the estate planning world.

The SECURE Act, at least in part, will alter how people leave IRA’s to their children at their death. Currently, IRA’s directed to children can be stretched over the child’s lifetime. In a nutshell, a 40-year-old who inherits an IRA can only be required to take small distributions each year over their life expectancy (approximately 43 years).

They can delay the tax until such time as their earned income is reduced. Under the new law, a 10-year payout will be required on all inherited IRA’s.The only exceptions are to a spouse, disabled or minor child, or someone less than 10 years younger than the deceased person.

The impact is likely to be tremendous on young working people. In today’s world of few defined benefit pensions and more IRA, 401k and 403B assets, the passing thus now has significant tax repercussions.

In addition to speeding up the taxability, the 10-year maximum withdrawal will have the unintended consequence of pushing people into new tax brackets, which in turn means more tax revenue.This will quite probably have a punitive effective on the young beneficiaries.

We are just beginning to learn the impact of this new law; however, in the estate planning world it means once again we will modify how we approach the tax issue. We will now likely be looking to Life Insurance to solve tax problems. We can use IRA distributions to purchase life insurance on the IRA owner to provide coverage for extra tax costs. This is a twist on an old problem, we once used life insurance to pay estate tax, now we will use it to pay income tax.

Robert K. Hilton, III is an attorney with the law firm of Hilton Estate & Elder Law, LLC, with offices in Rome, Utica, Boonville, Syracuse, Lowville and Gouverneur. He has more than 25 years of legal experience and currently concentrates in estate planning matters, including Wills, Powers of Attorney, Health Care Proxies, Revocable and Irrevocable Trusts, Asset Protection, Nursing Home/Medicaid planning and related litigation issues.

He can be reached at 315-624-9600 for free initial, confidential consultation. Visit us on the web at: www.Hiltonlawny.com.

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