The passage of the SECURE ACT on December 20, 2019 as part of the government’s spending bill (Further Consolidated Appropriations Act, 2020), will largely impact how much taxes non-spouse beneficiaries of solo 401k plan and IRAs will have to pay.
Prior to the passage of the SECURE ACT, non-spouse beneficiaries could distribute funds inherited from IRAs and solo 401k plans (once directly rollover over to a beneficiary IRA) over their life expectancy. The new law effective for 2020 and going forward now requires non-spouse beneficiaries to empty out the inherited funds over 10 years. Because of this law change and in preparation of decedent account tax planning, many IRA and solo 401k participants will convert their pretax funds to Roth IRAs, or Roth Solo 401ks since Roth distributions from inherited funds are not subject to taxes.
Here is how the non-spouse distribution rules will work under the SECURE Act:
- Changed to help pay for the changes found under the SECURE Act, effective for solo 401k, ROBS 401k and IRA owner deaths in 2020 or subsequent years, if the beneficiary is not the spouse, the beneficiary will be subject to more rapid distribution periods. Unless one of the exceptions listed below applies, nonsposue beneficiaries will be required to fully distribute inherited funds within 10 years. There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year. Here are the exceptions if they occur at the time of the solo 401k or IRA owner’s death:
- disabled individuals,
- certain chronically ill individuals,
- beneficiaries whose age is within 10 years of the decedent’s age,
- minors (they would begin a 10-year payout period upon reaching the age of majority), and
- recipients of certain annuitized payments begun before enactment of the SECURE Act.
VISIT HERE to learn how other provisions of the SECURE ACT will impact IRAs and solo 401k plans.
