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New IRS Regulations Applicable to SECURE Act – Part 2

The subject of last week’s post was the proposed regulations concerning the SECURE Act which was passed by Congress and signed by President Trump at the end of 2019.  This law made significant changes to the rules concerning IRAs and other tax deferred retirement accounts.

To briefly summarize, while the new law raises the required minimum distribution (RMD) age from 70.5 to 72 (good), it also establishes an outer limit year by which, in most cases, assets need to be withdrawn from these taxed deferred accounts (bad).  To be clear, these new rules do not apply to your own IRA, meaning one which you establish yourself by making contributions while you are alive.  They are intended instead to severely limit the continued tax deferred status of an IRA that you inherit from someone else as a beneficiary when that account holder dies under what have been referred to as “stretch” provisions.

Last week we examined how this new law affects retirement accounts in which the surviving spouse is the death beneficiary.  This week we look at instances in which minor children are the death beneficiaries.

Most people designate their surviving spouse, or alternatively, their children as beneficiaries of their estate including retirement accounts.  Although it does not occur often, if a minor child (one who has not reached the age of majority as determined by state law) inherits an IRA does the 10 year cutoff (Outer Limit Year) by which the account must be emptied apply?  

The answer is that all assets must be emptied from the IRA no later than the year the child reaches age 31.  If the child dies before age 21 then the account must be emptied in the year that is the 10th anniversary of the child’s death.  I should also point out that while different states have different definitions of when the age of majority is reached, for the purposes of the SECURE Act that age is 21.  So you can see that no longer can such a child stretch out the IRA over their own life expectancy or even the “ghost” life expectancy of the now deceased parent.

Next week we’ll examine how the SECURE Act affects disabled individuals who are beneficiaries of IRAs and how the Act defines disability.