A New Twist on IRA Tax Planning

Updated: Oct 4, 2021


The SECURE Act created a new twist in tax planning when it took away the ability of most non-spouse beneficiaries to stretch their taxable inheritance out over their lifetime and instead forces them to take the taxable distribution within ten years, pushing them into higher brackets.

Let’s say there is a married couple, each with their own $1 million IRA, and they’ve named their spouse as primary beneficiary and their kids as contingent beneficiaries. Under the old rules, it was a no-brainer for the surviving spouse to take ownership of all the IRA money, withdraw their Required Distribution and then eventually pass the accounts to their kids at the second spouse’s passing, who then stretched their inheritance out.

But under the SECURE Act, this strategy doesn’t always work so well. In the same scenario, if the surviving spouse takes ownership creating a $2 million IRA and then ultimately passes it to the kids, the kids have 10 years in which to withdraw the $2 million and pay tax on it. Not such a great tax answer — it could easily be taxed in the 32% bracket and there goes $600k to Uncle Sam.

Here’s an alternative worth considering: it’s called a disclaimer. What happens in this scenario is that the surviving spouse “disclaims” or formally refuses some or all of the deceased spouse’s IRA and lets it pass to the kids as contingent beneficiaries. So now they have the 10 years to stretch out one parent’s IRA, and then when the second parent passes, they’ll have another 10 year period to stretch out the second parent’s IRA. A much better tax answer.

Planning has to be done ahead of time:

  1. Spouses have to be named primary beneficiaries, and kids have to be named as contingent beneficiaries on the IRA beneficiary form. Your will is irrelevant — it has to be the IRA form.

  2. Touch nothing after death! In order to execute a disclaimer, the beneficiaries cannot have “accepted” the property by taking distributions or transferring the account.

  3. The disclaimer is a legal document that is executed by a qualified estate planning attorney. It is not a simple form from the IRA custodian.

  4. The deadline for delivering the disclaimer to the custodian is 9 months from the date of death.

The SECURE Act requires us to take a fresh look at the old tax strategies — this scenario needs to be evaluated on a case-by-case basis. This is exactly the type of tax planning we provide to our wealth management clients included in their asset management fees. As fiduciaries, we believe that investment and tax strategies are intertwined, and we use our expertise as Certified Financial Planners (CFP®) and Certified Public Accountants (CPA) to proactively look for tax minimization opportunities for our clients. If you’d like to learn more about our investment and tax strategies, call or email me at ymarsh@marshpros.com. I’d be happy to discuss your unique situation with you.

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Financial Planning and Advisory Services are offered through Marsh Wealth Management (“MWM”) a TN registered investment adviser with its principal place of business in the State of TN. MWM and its representatives are in compliance with the current registration requirements imposed upon registered investment advisers by those states in which MWM maintains clients. MWM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. This website is limited to the dissemination of general information pertaining to MWM’s investment advisory/management services. Yvonne Marsh is an Investment Advisor Representatives of MWM. For information pertaining to the registration status of MWM please contact the firm or refer to the Investment Adviser Public Disclosure website. For additional information about MWM, including fees and services, send for our disclosure statement as set forth on Form ADV from MWM using the contact information herein. Please read the disclosure statement carefully before you invest or send money. MWM does not provide legal or tax advice.

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