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Plan To Pass On An IRA? Think Again
Before Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement), your non-spouse heirs could inherit your IRA or other defined contribution plans, such as your 401(k) or 403 (b), and minimize the tax implications by stretching withdrawals from these accounts over their lifetime.
But due to the SECURE Act, the tax benefit of stretching withdrawals over a lifetime has changed for IRAs and traditional retirement account assets inherited after January 1, 2020. Now, adult children and other non-spouse heirs who inherit qualified assets must liquidate these accounts and pay taxes within a 10-year period following the passing of a parent or relative.
Inheriting an IRA can have significant financial consequences
Depending on the size of the IRA or qualified plan inheritance and your beneficiary’s income, what you thought was a memorable legacy, could create a financial burden. This is because any distributions taken, due to the required 10-year timeline, could bump your beneficiary to a higher marginal tax bracket and increase their modified adjust gross income, which could potentially raise the Medicare premiums they’ll pay for the rest of their lives.
Even if your beneficiary plans to reinvest what they withdraw, they will face income tax exposure on any earned interest, dividends and realized capital gains.
The SECURE Act can also reduce your loved one’s inheritance1
This example shows the difference between an IRA inherited before January 1, 2020, and one inherited after the first of the year.
Exceptions to the SECURE Act 10-year distribution rule
If the beneficiaries of your IRA or other qualified plan beneficiaries meet the following criteria, they do not need to be concerned about these new 10-year distribution rules:
An insurance professional as a part of your estate planning team can help
Life insurance can be an ideal way to pass wealth to non-spouse heirs because the death benefit transfers income tax-free, and it does not affect tax brackets or Medicare premiums. And, there are no required minimum distributions.
So, help protect your beneficiaries. Meet with your estate planning team to discuss tax-efficient ways to create your legacy.
Contact us today if you have any questions about how Sagicor’s products or services can help you or your loved ones.
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Sources:
1 Kiplinger’s Retirement Report, March 2020.
Sagicor Life Insurance Company, home office Scottsdale, Arizona issues life insurance and annuities. Products not available in all states and state variations may apply. Products have limitations and restrictions including surrender charges.
Form Number: 9429
