Originally Posted by
NotMrNiceGuy
Look up something called the “Stretch IRA” or “Stretch 401(k)” for more information.
Here’s the Cliff’s Notes version:
Prior to last year, an inherited IRA could be passed on to an heir and the RMDs would then be based on the recipient’s life expectancy. The SECURE Act changed the time period for RMDs from life expectancy to ten years. Now the inherited IRA must be withdrawn in 10 years so Uncle Sam gets his take sooner. This means if you passed on $2M to your kid, they take out $200,000 per year which puts them in a higher tax bracket for the duration of their withdrawals rather than if they just took out maybe $40,000 per year starting in their 30’s. It effectively transfers a large portion of your kid’s inheritance to the government and they have to transfer the remainder to a taxable account after the ten years is up.
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I agree the change was not positive. However, your child will still get the money tax free. They simply only get ten years of tax free growth instead of decades. So, they will likely miss out on millions in gains if you passed them a $2 million Roth IRA account, which is quite possible for someone at a mainline carrier for several decades.