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The Titanic Shift That Just Occurred for 401(k) and IRA Savers

Aug 12, 2020

Key Takeaways

  • Passage of the SECURE Act may accelerate and increase taxes when IRAs are left to heirs.
  • State tax rates may further increase as a result of COVID-19-related budget challenges.
  • With proper planning, IRA owners can leave more to their families and less to the government.

 

High-income savers have long used retirement savings plans to pass wealth on to their heirs. An adult child inheriting a 401(k) or Individual Retirement Account could withdraw that money in small bites over their lifetime, paying minimal taxes along the way and allowing the bulk of it to continue growing tax-deferred, often for decades. However, thanks to passage of the SECURE Act in 2019, this so-called “stretch IRA” is largely dead.

Now, most taxpayers who inherit an IRA, with a few exceptions (e.g., a spouse or minor child of the decedent), must cash out those assets within 10 years. Because taxes are due the year withdrawals are taken, this dramatically accelerates the tax bill associated with an inherited IRA.

For higher-income heirs, combined federal, state and local taxes on withdrawals from an inherited IRA can be as high as 40% or more. And those rates could go higher still in the years ahead. This guide covers strategies to minimize taxes and leave more net wealth to adult children.

For Compliance Use Only:1038219-00003-00

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