If you’re like many people starting the estate planning process, your retirement accounts comprise a significant portion of your assets. You’ve already designated the beneficiaries directly on these accounts, but it’s still a good idea to include them in your estate plan. Note, however, that if there’s any discrepancy, the law requires the assets to go to the beneficiaries listed on the accounts.
There have been some changes in the law in recent years that could affect whom you choose to leave your traditional individual retirement account (IRA). Specifically, let’s look at changes made in the Setting Every Community Up for Retirement Enhancement (SECURE) Act that took effect in 2020.
Before the SECURE Act, traditional IRA beneficiaries often had a considerable length of time to take distributions (which count as income for tax purposes) based on their life expectancy. Therefore, if you left a seven-figure IRA to a 25-year-old niece, she had decades to take distributions from it.
What are eligible designated beneficiaries?
Under the SECURE Act, anyone who is not an “eligible designated beneficiary” of a traditional IRA must take distributions of the total balance within 10 years. That can add up to a lot of additional income – and taxes.
Those who are considered eligible designated beneficiaries, however, don’t have that 10-year restriction. That’s because they’re considered family members who need continued financial support after someone passes away. These are:
- Surviving spouses
- Minor children (until they reach 18)
- Disabled or chronically ill beneficiaries
- Non-spouses less than 10 years younger than the deceased
These beneficiaries are subject to the estimated lifetime distribution rule. There are specific requirements for some of these categories, however.
What this means is that you may choose to leave children, grandchildren and other family members who are relatively young adults (say in their 20s through 40s) assets other than traditional IRAs or have multiple beneficiaries for each IRA. With experienced legal guidance, you can help ensure that your estate benefits your loved ones in the way you intended and doesn’t become an unintended tax burden on them.