The SECURE Act In December 2019, Congress passed legislation called the SECURE Act that included numerous retirement savings reforms. Arguably the most significant change is this... For original IRA owners who died before Jan 1 2020: Non-spouse IRA beneficiaries could spread out Required Minimum Distributions from the inherited IRA account over the course of their entire life. Now, for original IRA owners who die on or after Jan 1 2020: Non-spouse IRA beneficiaries must withdraw all assets from the inherited IRA account within 10 years of the death of the original IRA owner. (some exceptions apply, including for minor children and disabled beneficiaries). This rule change is another reason to consider periodic Roth conversions during retirement. Below are two scenarios that explain why. Scenario #1: Inherited Traditional IRA Mary is age 60. Mary's mom dies in 2021. Mary is named as the sole beneficiary of her Mom's Traditional IRA. When Mary's mom dies, Mary can chose to either: Option 1 - Cash out the entire balance of her mom's Traditional IRA at once, or Option 2 - Transfer the funds into an inherited Traditional IRA In the vast majority of cases, Option 2 will make sense. Mary can transfer the entire balance of her Mom's Traditional IRA into an inherited Traditional IRA without any immediate income tax (estate and/or inheritance taxes may still apply). With Option 1, the full amount of her Mom's Traditional IRA would be included in Mary's taxable income that year. Because Mary is age 60 in this example and possibly already in her highest income earning years, this would have the potential to increase her tax bracket further and result in a very large tax bill. Assuming Mary does Option 2 and transfers the funds into an inherited Traditional IRA, she'll have 10 years from the date of death of her mom to withdraw all funds from the inherited Traditional IRA. This is what the SECURE Act changed. Before this law change, Mary could have chosen to spread out withdraws and the subsequent tax liability over the course of her life. Now, all funds must be withdrawn and taxed within 10 years. Let's say Mary inherits a $100,000 Traditional IRA. She can chose to defer all minimum distributions for 10 years. However, in the 10th year, she'd have to withdraw the entire account balance at once. Mary's originally inherited $100,000 earned an average return of 7% per year over the 10 year period. At the end of 10 years, the account is now worth $200,000. The amount she inherited ($100,000) + all the gains (another $100,000) would both be included in her taxable income when she withdrawals the money in the 10th year. This would potentially increase her tax bracket and also potentially increase her Medicare Part B and Part D premiums, which are based on income (here is the Medicare Premium Table: Medicare.gov) As a result, it would probably be better for Mary to slowly distribute the money over time so she doesn't significantly increase her tax bracket and Medicare premiums in the 10th year. She might chose to distribute the money roughly equally over 10 years. If she's retiring at age 65 (5 years from now in this example) and her income will drop significantly once she retires, maybe she waits 5 years to start distributing the money. Regardless of the specifics of her overall situation, she should take withdrawals during the 10 years in a way that minimizes her tax liability and also minimizes potential increases of her Medicare premiums (because Medicare Premiums are based on MAGI, if you're married and file jointly, inherited IRA distributions may also inadvertently increase your spouse's Medicare premiums too). Scenario #2: Inherited Roth IRA Mary is age 60. Mary's mom dies in 2021. Mary is named as the sole beneficiary of her Mom's Roth IRA. When Mary's mom dies, Mary can chose to either: Option 1 - Cash out the entire balance of her mom's Roth IRA at once, or Option 2 - Transfer the funds into an inherited Roth IRA Option 2 makes sense here. Mary can transfer the entire balance of her Mom's Roth IRA into an inherited Roth IRA without any immediate income tax. Further, because this is a Roth account, Mary also won't have to pay income tax on any potential future gains. With Option 1, the money wouldn't be subject to income tax because this is a Roth account, but she'd waste the potential for future tax-free gains by taking money out of the Roth structure. Assuming Mary does Option 2 and transfers the funds into an inherited Roth IRA, she'll have 10 years from the date of death of her mom to withdraw all funds from the inherited Roth IRA. Let's say Mary inherits a $100,000 Roth IRA. She can chose to defer all minimum distributions for 10 years. She should do this unless she needs the money because all potential future growth will come out tax free. Mary's originally inherited $100,000 earned an average return of 7% per year over the 10 year period. At the end of 10 years, the account is now worth $200,000. The amount she inherited ($100,000) + all the gains (another $100,000) would both be distributed tax free. When Mary inherits a Traditional IRA, she had to worry about increasing her tax bracket and increasing her Medicare premiums. When Mary inherits a Roth IRA, those risks don't apply because the amount inherited + all future gains can be distributed tax free. The bottom line: Inheriting a Roth IRA is MUCH simpler and MUCH better for Mary than inheriting a Traditional IRA. Potential Action Items #1 - Consider periodic Roth conversions during your retirement. Convert an amount that keeps you in your current tax bracket (in some cases, jumping from the 22% to the 24% federal bracket may be worthwhile). Also, watch the impact of Roth conversions on Medicare Premiums (Premium Table linked again here: Medicare.gov) #2 - If you might inherit IRA accounts at some point, discuss Roth conversions with the current IRA owner (in most cases, parents). Want To Discuss This Individually? 1 - For clients: Call or email me any time as always. 2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures