By Heidi Huiskamp, Founder and CEO of Huiskamp Collins Investments, LLC
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was one of the biggest blasts to retirement planning to come down the chute in many years when it was signed into law in 2019 and took effect the beginning of 2020. One big bonus was the postponement of Required Minimum Distributions (RMDs) until age 72, up from 70-1/2. A blow to decades of retirement planning, though, was the “death” of the “Stretch IRA.” Prior to this legislation, an investor could designate a non-spouse as a beneficiary to their retirement account and that heir could “stretch” the distributions of that account over the actuarially-developed number of years of their expected lifetimes, thereby maximizing potential growth and minimizing required annual distributions and the resulting taxes on those distributions. Starting in 2020, those who inherit retirement accounts are now classified as either eligible beneficiaries or non-eligible beneficiaries. Those that are eligible can still take distributions over their lifetimes as decreed by a factor from an actuarial table. Ineligible beneficiaries, on the other hand, must empty the entirety of the retirement account by the end of the 10th year after the year of the date of death of the investor. Let’s explore the five classes of eligible investors in the paragraphs that follow.
The largest group of protected heirs are the spouses of the original investors. Upon the death of the saver, the spouse can add the proceeds of her/his spouse’s account to their own IRA or establish a new IRA and designate their own beneficiaries. RMDs are calculated according to their expected lifetimes rather than the lifetime of the original owner. Please note that it is a requirement that the heir be the legal spouse of the descendant. In some states, common-law partners are recognized for certain benefits, but not when it comes to beneficiary IRAs.
The next group of eligible beneficiaries are disabled persons. This can be confusing as the definition of “disabled” as applies to IRAs is not the same as the definition that may rule in disability insurance or state disability benefits. To satisfy the requirement of being an eligible beneficiary when it comes to an inherited IRA, the person in question must not be able to engage in any gainful activity for the foreseeable future until their death. A professional who can no longer perform their role but can function in another form of gainful activity would not qualify.
The third group that is a protected class is the chronically ill. The test here is that the person in question can’t perform at least 2 of the 6 activities of daily living: bathing, dressing, toileting, transferring, continence, and feeding. Some individuals may experience impairment of these after illness or surgery, but the chronically ill individual who is an eligible beneficiary is someone for whom these impairments are expected to last indefinitely until the time of their death.
Another group of eligible beneficiaries are those individuals who are not more than 10 years younger than the person who died. This may include siblings, other relatives, or dear friends who are close in age to the descendant. It can also include the descendant’s parent(s) if they are still alive at the death of the investor. Though not close in age, they would not be 10 years younger, so they would qualify for stretch status.
The last group of heirs that has protected stretch status is minor children of the original account owner and this can get a little tricky. Please note that this is not any minor children, but only minor children of the descendant. Also, they are only allowed to take stretch distributions up to the age of majority and then their status changes and the 10 year rule immediately locks into place. Lots of confusion surrounds “age of majority” and what that really means. Even professionals get it wrong. According to the tax code for these purposes, an individual can still qualify as a minor up to the age of 26 if they are still engaged in a continuing course of study that is at least half-time in nature. For those pursuing advanced degrees, this is a win. Not only are they allowed to take lower distributions and pay less in taxes while they are not employed full-time and bringing in full-time income, but bigger 10-year disbursements can contribute to student loans or other “launch” costs.
I take pride in staying up-to-date on retirement and tax planning legislation and it would be my honor to guide you on your retirement and estate planning journey. I would love to welcome you to my office for a cup of coffee and a conversation on how we may partner together. Please call me at 563-949-4705 or email me at firstname.lastname@example.org.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.