As you are likely aware, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) in December 2019. This law made significant changes to how your standard retirement accounts will operate starting January 2020. This article will not explore all of these changes, rather, it will focus on some discussion points you may want to have with your financial advisors, accountants, and estate planning attorneys.
Immediate Impact to You
The SECURE Act has a few changes that may immediately impact your retirement planning. First, the Act has increased the age for mandatory distributions from age 70 1/2 to 72. This extended mandatory distribution timeline coincides with our longer life expectancies and adds valuable time for additional growth of the account while many of us are still working. The SECURE Act also permits additional contributions from earned income beyond the age of 72, for those still working or otherwise creating earned income.
These changes are significant to those reaching retirement age and we encourage you reach out to your financial team to discuss how it may impact your immediate future.
Impact on Future Planning
The SECURE Act’s impact on your future estate planning objectives are significant. Just as before, retirement accounts can be rolled over to specified beneficiaries or to certain types of Trusts. In the past, these roll overs, especially to children or grandchildren, could be “stretched” over the lifetime of the beneficiary. This stretch IRA could greatly increase the value of the retirement account over the lifetime of the beneficiary. The SECURE Act largely eliminates the stretch IRA. Now requiring beneficiaries to withdraw the entire inherited account balance by December 31st of the year that contains the 10th anniversary of the account owners date of death.
There are limited exceptions to this new rule, meaning certain beneficiaries may still be able to “stretch” the inherited account. These beneficiaries, known as Eligible Designated Beneficiaries (“EDB”), include: (1) surviving spouse; (2) disabled or chronically ill individuals, and individuals less than 10 years younger than the account holder. In addition to these EDB’s, minor children who inherit a retirement account my use the child’s life expectancy for required minimum distributions until the child turns 18. The minor beneficiary must withdraw the remaining retirement account balance under the 10-year rule (so usually by 28).
How Does the SECURE Act Impact My Estate Plan?
Many clients have designed their gifting strategy of retirement accounts based on obsolete “stretch IRA” planning. With the SECURE Act, the stretchability of many of these plans has become obsolete or significantly impaired. As such, it is important to consider what your gifts mean for your beneficiaries.
Beneficiaries will likely pay more in taxes. If we think through a common scenario, Dad passes away and leaves his IRA to his adult children. The children who are in their 40’s and 50’s are in their prime earning years and highest tax brackets. The obvious observation is that when those funds are paid out, they will be taxed significantly more than they would have been in the beneficiary’s retirement years. This concern will likely initiate many conversations with financial teams about traditional vs. Roth IRA accounts.
Another concern comes up when a
is the beneficiary of an IRA. The Trust, if properly drafted, will be subject to the same 10-year rule above. (Assuming non-minors or EDB’s are the beneficiaries of the Trust). The two primary mechanisms for handling retirement accounts are the Conduit Trust and the Accumulation Trust. Retirement account funds received by a Conduit Trust are directly paid out to the Trust’s beneficiaries upon receipt. Conversely, in an “Accumulation Trust” the Trustee may maintain the funds inside the Trust for the benefit of the beneficiary(ies). Obviously, the Accumulation Trust provides greater control over the funds, however, it may also be subject to a much higher income tax.
Lastly, for some families, using a stand-alone IRA Beneficiary Trust, may make a little more sense. Every beneficiary (with some exceptions) is treated alike with both Conduit Trusts and Accumulation Trusts. An IRA Beneficiary Trust, on the other hand, may be used to add layers of flexibility to how beneficiaries are treated. For example, the creator of the Trust can designate different percentages of the retirement account to beneficiaries or make some Conduit or Accumulation.
The SECURE Act has significant implications for your retirement accounts and how they will be treated during and after life. As such, we strongly recommend you sit down with your advisors to review your plans. Your goals are important, take time to make sure your plans are still effective.