In an unexpected end-of-year move, a Democratic House and a Republican Senate and President came together to impose the largest death tax increase in recent memory. The Secure Act, among other things, reverses nearly two decades of tax benefits, mainly children who inherit their parents’retirement accounts.
“Before the Secure Act, beneficiaries used to be able to avoid severe income tax burdens when inheriting an IRA or 401k,” attorney and author Jeffrey G. Marsocci said. “Setting up an inherited IRA and then moving the tax-deferred money into that account could have allowed the beneficiaries to spread the tax burden out over 15, 20, or more years while still enjoying tax-deferred growth. Now all of the distributions must be made within ten years, and taxed accordingly. Imagine inheriting a parent’s $500,000 IRA and adding $50,000 of income to your 1040 for the next ten years. Or worse, only taking about $10,000 a year for nine years and being left with $410,000 of extra taxable income in year ten.”
One certainty is that handling the inheritance of a retirement account is no longer a one-time setup that can run on autopilot, and ongoing professional assistance is advised. While the added taxes are regrettable, there is some good news and some exceptions from these burdensome new taxes. One specific option is a financial technique that could spread the payments, and the tax burden, evenly over the full lifetime of the beneficiary. For a specific review of the vulnerability of inherited income taxes for your estate, please contact your financial advisor or contact us at 919-844-7993 and our Asset Coordinator Mike Brooks can conduct a free review.
For more information on some specific exceptions to these new rules and other topics related to the Secure Act, please follow Jeff on social media.