How Does The SECURE ACT Affect Me?

1. If Your Heir Is Still Working:

When your heir inherits a retirement account (like a traditional IRA or 401(k)) while still working, the SECURE Act imposes new rules that affect how they manage the inherited funds.

• 10-Year Rule: Under the SECURE Act, most non-spouse beneficiaries, including working heirs, must withdraw the entire balance of the inherited retirement account within ten years of the original account holder’s death. This rule applies to traditional IRAs, 401(k)s, and other qualified plans. No minimum distributions (RMDs) are required within those ten years, but the account must be fully depleted by the end of the 10th year.
• Impact on Taxable Income: Since your heir is still working, they likely have a steady income stream. If they withdraw large amounts from the inherited account, these distributions will be taxed as ordinary income, potentially pushing them into a higher tax bracket. This could significantly increase their tax liability, especially if they defer withdrawals until the later ten years when they might need to take more significant distributions.
• Strategic Withdrawals: To minimize the tax impact, your heir may want to spread the withdrawals over the ten years, taking smaller distributions each year to avoid being bumped into a higher tax bracket. This strategy requires careful planning to balance the inherited account withdrawals with their regular income.

2. If Your Heir Has Retired:

If your heir inherits your retirement account after retirement, the impact of the SECURE Act’s provisions differs, primarily because their income situation may have changed.

• 10-Year Rule Still Applies: Like working heirs, retired heirs must also withdraw the entire balance of the inherited account within ten years. The absence of RMDs within those ten years allows some flexibility in timing the withdrawals, but the account must still be depleted by the end of the decade.
• Potentially Lower Tax Bracket: Retirees often have a lower income than during their working years, which might place them in a lower tax bracket. This could mean that distributions from the inherited account will be taxed lower than when they were working. However, large withdrawals could still push them into a higher tax bracket, especially if they receive other income sources, such as Social Security or pension payments.
• Consideration of RMDs from Their Accounts: If your retired heir has a retirement account, they may have already taken the required minimum distributions (RMDs). Adding withdrawals from an inherited account to their income could complicate their tax situation. They’ll need to plan carefully to avoid a spike in taxable income.
• Healthcare Costs and Medicare Premiums: Large withdrawals from an inherited retirement account could impact retired heirs’ Medicare premiums. Higher incomes due to withdrawals could increase their Medicare Part B and Part D premiums, as these are based on income levels. Additionally, large withdrawals could affect eligibility for certain income-based benefits or increase taxes on Social Security benefits.

Working Heir: The SECURE Act’s 10-year rule may push a working heir into a higher tax bracket if they don’t strategically manage withdrawals. To minimize tax liability, careful planning is needed to balance withdrawals with their current income.

Retired Heirs: A retired heir may benefit from potentially lower tax brackets, but they still need to be cautious about large withdrawals, which could increase taxes and Medicare premiums and affect other income-based considerations.

In both situations, the SECURE Act necessitates proactive tax planning to optimize the timing of withdrawals and minimize the tax impact on your heir’s financial situation.