The recently passed SECURE Act, which makes changes to rules governing retirement accounts, is getting a warm reception from retirement planners, who are generally supportive of the changes.
But some of the rules could negatively affect you if you inherit someone’s retirement account. Under the SECURE Act, you’ll have to pay taxes on the money sooner -- and generally faster -- than under the old rule.
Until now, if you inherited someone’s IRA or 401(k), the rules required you to withdraw the money and pay taxes on it over your life expectancy. If you were 30 years-old, that meant you might have 50 years or more to withdraw the money, with each withdrawal adding to that year’s taxable income.
Under the new rules, you will now have just 10 years to withdraw all the funds from the account and pay taxes on it. If there is $500,000 in the retirement account, that averages to increasing your taxable income by $50,000 a year. However, the law does not specify how much you should withdraw at a time -- only that the full amount must be withdrawn and taxed by the end of 10 years.
There are some exceptions to this new rule. A surviving spouse or someone chronically ill or disabled can still take the withdrawals over life expectancy. For a minor child who inherits an IRA, the 10-year clock doesn’t start until they reach age 18.
Beneficiaries who have already inherited an IRA and are taking taxable withdrawals based on life expectancy will continue to do so. Starting in 2020, inherited retirement accounts are subject to the SECURE Act.
The government is motivated to get the money out of tax-deferred retirement accounts at a faster pace because it isn’t taxed as long as it remains in these accounts. By some estimates, the new law will increase tax revenues by $16 billion.
However, there are some tax benefits for people who have IRAs. The old rules required account owners to make taxable withdrawals at age 70 ½. The SECURE Act raises the age to 72.
The law’s main objective is to expand the number of people who can participate in a retirement plan at work. A study by the Pew Charitable Trusts found that 25 percent of people working for private companies don’t have access to a retirement plan like a 401(k). John Carter, president and COO of Nationwide Financial, says the new law should change that.
"The SECURE Act is a much-needed and highly anticipated step in creating new pathways to retirement security,” he said. “We have new opportunities today to protect people, businesses, and futures in proven and innovative ways."
Nationwide’s recent survey of business owners found that 80 percent believe the new law will allow them to offer a retirement plan that rivals those offered by large companies.