Estate Planning | Making a Difference One Family at a Time

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IRA inheritance planningIf you have saved money in an IRA, you are not just planning for retirement. You are also creating a valuable asset that can support your loved ones after you are gone.

But leaving an IRA to your beneficiaries is not always as simple as naming a person on a form. The rules for inherited IRAs have changed in recent years, and a mistake can lead to unexpected taxes or missed opportunities.

In light of the shifting landscape, it’s important to understand how IRA inheritance planning works. With the right strategy, you can preserve more of your savings and pass them on efficiently.

The SECURE Act Changed the Rules for Most Beneficiaries

In 2020, the SECURE Act (Setting Every Community Up for Retirement Enhancement) made major changes to how inherited IRAs are handled.

Before the law passed, most non-spouse beneficiaries could stretch distributions over their lifetime. This allowed them to take smaller annual withdrawals, which reduced the tax impact and helped grow the account over time.

Now, most non-spouse beneficiaries must withdraw the full balance of the inherited IRA within 10 years. This rule applies whether the IRA is traditional or Roth.

There are no required distributions each year, but the account must be fully distributed by the end of the tenth year after the original account holder’s death.

This change can significantly increase the tax burden, especially if the beneficiary is in their peak earning years. That is why proper planning is more important than ever.

Spouses Still Have Special Options

If you are married and want to leave your IRA to your spouse, the rules are more flexible. A surviving spouse has the option to:

  • Roll the inherited IRA into their own IRA
  • Treat the inherited IRA as their own
  • Remain the beneficiary and take distributions based on their own life expectancy

These options provide more time and more control. They can also reduce taxes and preserve the account’s growth. If you are naming your spouse as your primary beneficiary, your estate plan can reflect how you want them to manage the account.

You Can Name a Trust as the Beneficiary

In some cases, you may want to leave your IRA to a trust instead of directly to a person. This can help you control how the funds are used, protect a vulnerable beneficiary, or provide for minor children.

However, naming a trust as the beneficiary of an IRA requires precise legal drafting. The IRS has strict rules about what qualifies as a “see-through” or “look-through” trust. If the trust does not meet those requirements, the entire IRA could be taxed much sooner than expected.

A properly designed IRA trust can allow distributions over the 10 years while maintaining the protections and instructions you want.

Roth IRA Advantages

A Roth IRA does not have required minimum distributions (RMDs) during your lifetime. That means the money can continue growing tax-free for as long as you live.

When a beneficiary inherits a Roth IRA, they do not owe income tax on withdrawals as long as the account has been open for at least five years.

However, the 10-year rule under the SECURE Act still applies. Your beneficiary must empty the account within 10 years, even though the distributions are not taxed.

To get the most benefit, your heirs may want to leave the money untouched for as long as possible, letting it grow until the final year.

This timing strategy is something you can discuss with your beneficiaries and your estate planning attorney.

Your Beneficiary Designations Override Your Will

Many people forget that IRA beneficiary designations are separate from your will or trust. That means whoever you name on your IRA beneficiary form will receive the account, regardless of what your will says.

For example, if your will leaves everything to your children but your IRA still names an ex-spouse or a deceased relative, the wrong person may receive the funds.

To avoid this, review your beneficiary designations regularly, especially after major life events such as marriage, divorce, birth, or death. This simple step helps your plan work as intended and avoids unnecessary legal problems.

Take Action Today!

We can help you integrate your retirement account into a comprehensive plan that aligns with all your objectives. To schedule a consultation, call our Westport, CT estate planning office at 860-548-1000.

If you are closer to Glastonbury, we have an office there as well, and you can use the same number to arrange a consultation at that location. And if you would rather send us a message, fill out our contact form, and we will be back in touch as soon as possible.

Attend a Complimentary Seminar

We host seminars that cover all of the most important aspects of the estate planning process. Our two locations are in Westport and Glastonbury, so the events are held in these areas. To see the dates and learn more, visit this page: Estate Planning Seminars Schedule.

Barry D. Horowitz, Estate Planning Attorney
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