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[Music] hi I'm Michael Rooker I'm the managing partner Greenbush Financial Group and today we're going to be going over the distribution options that are available to non spouse beneficiaries of IRAs and employed sponsor retirement accounts like 401 K s four three B's 457 plans now there were some big big changes made to the options in December of 2019 when Congress passed the secur Act into law the secured act actually took away one of the most valuable options that were available to non spouse beneficiaries called the stress provision so in this video I'm going to kind of go over the old rules what the new rules are for years 2020 plus for people that already have inherited IRAs what the grandfathering rules were can you continue if you elected the stretch option that going forward there's also some special rules with children that are minors and become beneficiaries of these accounts and also there's a lot of tax traps with the new law that's signed into place because beneficiaries are really gonna have to do some advanced tax planning otherwise they can cur higher taxes it could impact college financial aid Medicare premiums all these other things so with a passage of the secured act you're gonna find that now inheriting these retirement accounts is going to take a lot more tax planning out of the gate so let's first review how distributions from these inherited retirement accounts is taxed to you so any money that comes out of these accounts and is paid to you you have to pay ordinary income tax on so fed end state income tax similar to what you get taken out of your paycheck the one thing you avoid is the 10% early withdrawal penalty if you're the under the age of 59 and a half which is what usually applies if you take money out of IRAs or foreign K's early because it's considered a death distribution doesn't matter what your age is you don't incur that 10% penalty so before we get into all the changes we first have to review what the rules were before 2020 before we discuss what so if you inherited a retirement account prior to 2020 you had two options one was distribute the full account balance within a five-year period and pay tax on those distributions or option two was you could roll over that entire balance to your own inherited IRA which was a non-taxable event and then you just had to take small require minimum distributions each year based on your own life expectancy and by choosing option two you didn't create any big tax events because the distributions were relatively small now the secure act for 2020 going forward eliminated what was called that stretch provision you are now no longer able to roll that to an entire inherited IRA and stretch those distributions over your lifetime the stretch provision was replaced with the 10-year rule so similar to what option one used to be which is depleting the account in five years now going forward if you are a non spouse beneficiary of an IRA retirement account you have to deplete that entire retirement account balance within a ten-year period so since the 10-year rule is really the only option available to non spouse beneficiaries years 2020 and going forward let's discuss the details of that as well as the planning tax implications you may want to consider now the IRS has pretty much come out and said we don't care how and when you take those distributions from that account the only rule is it has to be completely distributed by the end of year 10 so I could take it all in year one I could take nothing and take it all in year ten or I could split the distributions evenly over a ten year period now this is where the strategy comes into play because remember all those distributions that come out of a retirement account are taxable income to you so if I inherit a $200,000 retirement account and I distribute it all in a single tax year I'm gonna have my earned income from working they're gonna put that 200 thousand I distribute it up on top of that and they're gonna probably pay a super high tax rate another two hundred thousand so it's almost money I'm just handing to the government that I could have avoided if I just spread that two hundred thousand evenly over a ten year period now the default of just spreading it evenly might not be the best tax strategy either and I'll give you a few examples here so if I have kids that are going to college in a few years financial aid looks at my income and it looks back two years so if I'm distributing money from these retirement accounts and I'm showing higher income I might be losing financial aid two years down the road where if I didn't take those distributions and waited till the kids are later in college then I can get my financial aid and retain more of a my inheritance also people that are approaching retirement so if I'm getting a paycheck for the next two or three years I probably don't want to take a lot from these retirement accounts because again it's going to get stacked up on top my income and I'm gonna pay at a higher rate probably makes sense to just delay those distributions from the retirement account until after I'm done working then as I take that taxable income it's probably going to be taxed at a lower rate now for people that are already retired you have to be very very careful about how when when you take these disbursements the reason being is if your taxable income goes up it can impact the tax rate that you pay for Social Security it can impact the premium amount that you pay for Medicare Part B and Part D you might be getting property tax credits such as the enhanced star which you could lose for normal taxpayers if you're showing more income it could you could be losing tax credits deductions that might prevent you from contributing to Roth IRAs so these are all considerations that as soon as you come into that inheritance you must have to start mapping out that ten-year period to determine what's the most advantageous way for me to deplete this retirement account over the next ten years the one item that I do want to clarify is there is no RMD a required minimum distribution requirement are the ten year rules they don't make it take a small piece each year that was under the old inherited IRA stretch provision nine spells beneficiaries were had to take those small amounts each year that does not apply to the ten year rule you can decide not to take any amount in a single year or you can take it all it's completely up to you now let's talk about who's grandfathered in under the old rules so if you already had an inherited IRA and you were taking your arm DS from it prior to 2020 you can continue to do that over your lifetime they are not going to force you to now distribute that balance over the next ten years so you're grandfathered in so really the line that's sanded if the person that owned the retirement account passed away prior to January 1st 2020 you still have that stretch provision available to you which allows you to roll that over it into an inherited IRA and take smaller MDS over your lifetime it's only if they passed away January 1st 2020 or beyond that you are now locked into that 10-year rule that you have to strip it of the full account during that period so like most new laws there's always exceptions to the rule and the secure act is no different there's going to be certain non spouse beneficiaries that will still be allowed to use the stretch provision and rollover their balance to inherited IRAs and take our MDS over their lifetime and the short list is any beneficiary that's disabled or chronically ill there are certain exceptions for minor children but they're limited and we'll talk about that later and then probably the most common will be if the decedent was not more than ten years older than you then you can still use the stretch provision so if it was a sibling or a cousin or something of that nature the stretch provision will still be available even for people that pass away past 2020 so the secured act did have special exceptions for children that were miners that were beneficiaries of these IRAs and retirement accounts so if a child is under the age of majority which is different based on the state that they live in so for New York the age is 18 so if someone's under the age 18 they're considered a minor if a minor inherits a retirement account they're allowed to roll it over to an inherit or they only have to take small requirement of distributions until they reach the age of majority and then they're required to deplete it in a ten year period so someone let's say we add ten-year-old in New York they inherit our time and account they gotta take small taxable distribution from that account until they reach age 18 once or eighteen they've got ten years to dis fully distribute that account balance by their 28th birthday in order for the exception to apply the child has to be both a minor and a child of the decedent if they don't satisfy both criteria they don't get the special exception and the account balance has to be distributed within a ten year period so an example would be if your child inherits an IRA from their grandparents even though they might be ten they are on the tenure clock immediately they don't get that special RMD until age of majority and then the ten-year period because they weren't a child of the decedent the ten-year period begins immediately as I mentioned the effective date for most of these changes is January 1st 2020 however if you inherit certain types of retirement plans they might have a different effective date for this change so if you end up inheriting a 403 B a 457 plan or a thrift savings plan from someone that was covered by a state local government or federal agency your effective date of this change is actually January 1st 2022 which means if someone passes away prior to January 1st 2022 and you inherit one of these accounts you will still have access to the stretch provision which will allow you to rollover that balance into an inherited IRA and stretch those small distributions over your lifetime as opposed to the new ten year rule the same is true for employees that are covered by collective bargaining agreements they also have that January 1st 2022 effective date for the new rules to take effect in summary the passing of the secured act is just going to cause none spouse beneficiaries to do a lot more advance planning right out of the gates before it was easier because we really just had to get that account over to an inherited IRA and set up those RMDs a year after but it never really created this huge tax impact those are M DS are relatively small now with the potential of these distributions being large really as soon as you inherit one of these accounts you really have to be speaking with someone that knows the tax and financial strategies that might allow you to shelter some of this for income we have a number of strategies we use with clients such as if money's coming in an IRA s you might be able to contribute more to an employed sponsor retirement plan via deferrals if your covered which kind of says hey it's taxable on one side and I get a tax for and the other side so it kind of wipes out the tax impact but there's another of other strategies that will most likely be using with clients to help minimize some of the tax impact of the new ten year roll if you have any questions or if you would like us to share some of those strategies with you feel free to contact us at money smart board com thank you [Music]