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Taxes, Retirement & Beneficiaries… What They Have in Common

Notice: The Secure Act is changing retirement -- here are the most important items to know

The recently signed act changes how beneficiaries will receive money. But not everyone will be affected and take a tax hit. According to this act, beneficiaries of retirement accounts must withdraw all the money out of the accounts within 10 years.


The new 10-year rule only applies to accounts of benefactors who die in 2020 and beyond. This will be hard hitting for those who’ve lost loved ones during COVID-19 and may not be aware. Current beneficiaries of inherited IRAs and 401(k) programs will be allowed to withdraw the required minimum distributions over their life expectancy.


The rule doesn't apply to spousal beneficiaries, disabled beneficiaries and people that are more than 10 years younger than the account holder. These people are excluded and will be able to receive distributions over their life expectancies. Children are exempt until they turn 18 and then they will have to withdraw the resources.


Tax amounts will change and effect people differently. Before, stretching the refunds within the beneficiary's life expectancy meant paying less in taxes. Now the rule may lead to higher tax bills. When you withdraw the money, you will be taxed according to your income. Required minimum distribution calculations are based on numerous factors, such as beneficiary's age, life expectancy and the account balance. This unfortunately drastically diminished the odds of withdrawing in a tax friendly manner for a lot of people.


Could I roll across the resources that are inherited into another traditional IRA? Do I have to keeping the money in this inherited IRA alternatives?


Non-spouses cannot roll over an inherited IRA from 1 account to another. They might simply take distributions from them, consistent with the Internal Revenue Service. It could help if they start looking into a trustee-to-trustee transfer account in the case the account being rolled over is set up under the IRA account holder name.


There are some more factors to take into consideration. Beneficiaries nearing their own retirement, within 10 years, might want to postpone taking anything from inherited accounts beneath the 10-year rule until after they've retired, that way any withdrawal isn't considering their income.


The best thing to do is to speak with a financial specialist and come up with a plan that will have the least amount of impact on your loved ones. A financial specialist will guide you in the right direction and provide options. One option specifically for a benefactor, is to buy life insurance. The benefactor will have to pay taxes on the premium, but the beneficiary will receive the insurance death benefit tax free. Beneficiaries should seek out a financial specialist that will strategize the best time to withdraw money from these accounts, the possibility of transferring to another account, and the best way to avoid paying more taxes.


Have questions? Want more information about this topic? Contact the HOPE Accounting Firm at 216.744.9303 or at contact@hopeaccountingfirm.com.

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