Planning Implications of the SECURE Act
On December 20th, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) into law, creating sweeping changes to how you will manage your IRA and retirement accounts throughout your lifetime. You may have already heard that the law gives a nod to longer life expectancies by increasing the age at which you must begin taking money out of your retirement plans, while also allowing you to contribute to them for a longer period of time. Unfortunately, you may not have heard that the SECURE Act takes away some very valuable options for passing your IRA’s and other retirement accounts on to your family when you die, a change that will cost taxpayers billions. Below is a summary of some of the most important changes for those who are nearing or in retirement, planning for Required Minimum Distributions, or who expect to have significant retirement account balances they will leave to their heirs.
Elimination of Age Restriction for Contributions
The SECURE Act repeals the historical prohibition on contributing to your IRA after age 70-1/2. Beginning in 2020, you will be able to contribute to an IRA regardless of your age if you have earned income. However, you still cannot contribute for the 2019 tax year if you reached 70-1/2 before December 31, 2019.
Required Beginning Date (RBD) for Distributions Increased to Age 72
The SECURE Act increases the age at which you must begin taking Required Minimum Distributions (RBD’s) from your retirement accounts to age 72, from age 70-1/2. However, you must continue taking your RMD’s according to the pre-SECURE Act rules if you turned 70-1/2 before 12/31/2019. If you choose to continue working after your RBD, you can still delay distributions from your employer provided retirement plans until you stop working. Unfortunately, this same delay does not apply to IRA’s and the rules are a bit tricky, so you should consult a tax advisor to ensure you don’t get caught in an unexpected (and potentially expensive) trap.
Qualified Charitable Distributions (QCD’s) Still Available
Once your reach age 70-1/2, you will still be able to make direct gifts to a qualifying charity up to $100,000 annually, without the distributions being included in your taxable income. These gifts will continue to be counted against your RMD requirement in the year of the gift if you have reached your Required Beginning Date. However, all contributions to an IRA during any given year will result in a dollar for dollar reduction in the $100,000 limit on QCD’s.
Elimination of the “Stretch IRA” for Non-Spouse Beneficiaries
Unfortunately, the SECURE Act requires your retirement plans to be distributed to most non-spousal beneficiaries within 10 years of your death if you turn age 70-1/2 after 12/31/2019. This change eliminates the ability to “stretch” the distributions over the life expectancy of a much younger beneficiary, such as a child or grandchild. It has been estimated that this change will cost the American taxpayers $16 billion through accelerated taxation, while also rendering many taxpayer’s estate planning ineffective, a topic discussed more below.
There are only a few “Eligible Designated Beneficiaries” that do not have to withdraw the funds from your retirement plans within 10-years.
- The account owner’s surviving spouse, who can still take the IRA account as their own and withdraw the funds over their lifetime.
- A minor child, who can defer the distribution until they reach the age of 18, when they will be subject to the 10-year payout rule.
- A beneficiary who is not more than 10-years younger than the account owner.
- A beneficiary that is chronically ill as defined in the Act.
Your Current Estate Planning May be Ineffective
With retirement accounts becoming an ever-increasing share of many estates, the elimination of the “Stretch IRA” can have devastating implications if you have large retirement plans you don’t intend to drain during your lifetime. If you have concerns about your heir’s ability to handle large sums of money, you may have named a conduit (or “see through”) trust as the beneficiary of your retirement accounts to protect them from outside threats, or a beneficiary’s spendthrift ways. A conduit trust allows the trustee to utilize the age of the trust’s oldest beneficiary to calculate rather small annual RMD’s, that are typically paid out to the beneficiary each year. However, the lion’s share of the retirement account(s) will remain in trust, protected from overspending, lawsuits, failed marriages and other threats. The SECURE Act’s 10-year payout rule eliminates the effectiveness of this strategy by forcing all assets out of the trust within ten years of your death, potentially frustrating your long-term plan for protecting the assets.
An Accumulation Trust May Help
Unlike a conduit trust, an accumulation trust gives the trustee the right to retain the trust’s income, including RMD’s, in trust for later distribution. Income retained in the trust is likely to be subject to a higher average income tax rate due to the compressed income tax brackets applied to trusts. However, the trustee is afforded the opportunity to protect the retirement plan assets from the various threats inherent in distributing large sums of money to inexperienced or irresponsible heirs. It is possible that careful trust drafting and thoughtful withdrawal planning over the 10-year distribution period would offset the impact of the trust’s compressed brackets. In certain cases, the ability to protect the assets so that they are available to your beneficiaries for legitimate future needs will trump the negative tax implications. Your individual circumstances will dictate the steps you choose to take. The staff at Legacy Trust would be happy to help you determine what path is right for you.
The SECURE Act is a comprehensive piece of legislation with too many facets to cover in one blog post. However, I have tried to discuss some of the more important changes for those who have reached the RMD age or where that time is in sight. I would encourage you all to review how the new RMD requirements apply to your individual situation. For those with concerns about your heirs receiving access to large sums of money, it is imperative that you carefully review your beneficiary designations and estate plan as soon as possible. Failure to do so may subject a large chunk of your life savings to unnecessarily high taxation, attack by creditors and an insecure future for your heirs. The staff at Legacy Trust is ready to help you consider your options and would welcome the opportunity to discuss your individual circumstances.