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The Secure Act (2019) has done away with the Stretch IRA and made several critical changes in the treatment of beneficiaries of inherited IRAs.
The short answer is yes, though there are important caveats. The Secure Act passed in 2019 (see the full text on congress.gov), changes the treatment of inherited IRAs. The new act classifies Beneficiaries as:
A. Eligible Designated Beneficiaries
- IRA owner’s spouse – Can treat the IRA as their own. May elect the single life expectancy rule or 10-year payout rule.
- IRA owner’s children (only those under 18) – May use the single life expectancy rule while in their minority; however, they must use the 10-year payout rule upon reaching 18 years old.
- An individual with a disability – May elect the single life expectancy rule or 10-year payout rule.
- An individual that is chronically ill – May elect the single life expectancy rule or 10-year payout rule.
- Any beneficiary less than ten years younger than the IRA owner – May elect the single life expectancy rule or the 10-year payout rule.
B. Designated Beneficiaries – Any beneficiary that does not meet the “Eligible Designated Beneficiary” criteria listed above. Subject to the 10-year payout rule.
C. Not Designated Beneficiaries – Any legal entity, including estates, charities, and non-qualified Trusts*. Subject to the 5-year payout rule.
*Conduit Trusts
Typically Trusts are classified as “Not Designated Beneficiaries.” Conduit Trusts are a notable exception to this rule. Conduit Trusts pass through all IRA benefits directly to the beneficiary. For this reason, The Secure Act allows Conduit Trusts to base their Beneficiary classification using the beneficiaries of the Trust. Therefore, if the Trust’s beneficiaries are “Eligible Designated Beneficiaries,” the Trust is viewed as an “Eligible Designated Beneficiary.”
A Conduit Trust can be the IRA’s beneficiary without forfeiting any classification advantages to which the beneficiaries would otherwise be entitled. However, if you were to name any “Not Designated Beneficiaries” among your Trust’s beneficiaries, this exception would be nullified, and the inherited IRA would be subject to the 5-year payout rule.
As you can see, the Secure Act’s implications for inherited IRAs are extensive and vital to understand for retirement planning. A full analysis is beyond this article; however, this overview provides a summary of some fundamental aspects. Always consult with an attorney before making decisions that implicate your estate plan.