Qualified Accounts and Non-Spousal Heirs – the Conundrum

We’ve spoken about this topic a few times, but it’s worth revisiting from time to time. There were 90 changes to this act last year. And per usual, the acronyms given often represent the opposite of what they say. So let’s revisit.

The SECURE Act, signed into law in December 2019, brought significant changes to retirement savings rules. Its main goal was to expand access to retirement plans and increase savings among Americans. Key provisions include:

• Raising the Required Minimum Distribution ( RMD ) age from 70½ to 72 (and later to 73, as amended by SECURE Act 2.0).
• The RMD age changes again in 2033 to 75.
• Allowing long-term part-time workers to participate in 401(k) plans.
• Eliminating the age cap for traditional IRA contributions – you can continue to contribute if you’re over 70 and still working.
• Requiring most non-spousal beneficiaries of inherited retirement accounts to withdraw all funds within 10 years of the account owner’s death (this replaced the “stretch IRA” provision).

Why Leaving Qualified Accounts to Non-Spousal Heirs Is Now Problematic

Before the SECURE Act, non-spousal beneficiaries (like children or grandchildren) could “stretch” distributions from inherited IRAs over their lifetimes. This allowed:

• Lower annual taxable distributions,
• Long-term tax-deferred growth, and
• Better wealth transfer planning.

Under the SECURE Act:

• 10-Year Distribution Rule Non-spousal heirs must now liquidate the entire inherited IRA or 401(k) within 10 years of the account holder’s death. This compressed timeline can create several issues: Larger annual distributions, often during heirs’ peak earning years,
• Higher income taxes, potentially pushing beneficiaries into higher tax brackets,
• Lost compounding, as assets are withdrawn and taxed more quickly.
• No RMDs Within the 10-Year Period While there are no annual RMDs during the 10-year window, all funds must be withdrawn by the end of the 10th year. This could result in a large tax hit if heirs delay distributions and are forced to take a lump sum. Planning is key.
• Limited Flexibility The 10-year rule removes the ability to time distributions over a multi-decade period, reducing flexibility in financial and tax planning for heirs.
• Estate Planning Disruptions Trusts commonly used as IRA beneficiaries may no longer function as intended under the new rules, potentially leading to unintended tax consequences or loss of asset protection.

Conclusion

While the SECURE Act aimed to modernize retirement savings, it created significant drawbacks for non-spousal beneficiaries of qualified accounts. If your estate plan includes leaving IRAs or 401(k)s to children or other heirs, it’s critical to reassess your strategy. Alternative approaches, such as Roth conversions, charitable planning, or life insurance, may help mitigate the tax burden and preserve wealth across generations. We have a few strategies that allow more of your hard earned wealth to remain “in the family” and not be lost to the IRS. And, there are ways to control that wealth into the future if so desired.

If your interest is piqued, and it should be, let’s regroup on your goals. When the rules change, it’s important to adjust where necessary.