Between the holiday bustle, yearend to do’s and political news, you would be forgiven for missing the SECURE Act, which was signed into law December 19th. This act, “Setting Every Community Up for Retirement Enhancement (SECURE)” carries with it a number of changes that are likely to impact your retirement and estate planning. We’ve done our best to consolidate the information available to what we believe will be the top questions from our client families.
How will the SECURE Act impact my IRA?
If you’ve heard only one thing about SECURE, it’s probably that it ends the ability to “stretch” inherited IRA distributions for non-spousal beneficiaries. Prior to this act, IRA owners could leave their heirs as outright beneficiaries, who could then “stretch” the distributions across their own life expectancy.
For any IRA’s inherited after 12/31/2019, non-spousal heirs will be required to liquidate the IRA within 10-years of the inheritance. This applies to both Traditional and Roth IRA accounts, and could dramatically change the tax consequences associated with an inherited IRA, depending on its type and size.
Moving forward, inherited IRA owners will have access to the entire account, but won’t be subject to required minimum distributions until year 10. For those inheriting a Traditional (pre-tax) IRA, waiting to take the entire amount in one year could cause a tax headache since distributions will be taxed as ordinary income. This is particularly true if they were to inherit during the prime of their careers when income is typically highest.
For those inheriting a Roth IRA, on the other hand, it may make sense for inheritors to wait until the 10th year to take a distribution in order to allow the maximum amount of tax-free growth.
Should I consider updates to my IRA beneficiary designations and/or estate plan?
An update may or may not be necessary, but it’s a good idea to call us and your estate planning attorney to see how these rules affect your unique situation.
If your Traditional IRA beneficiary is:
- Your spouse: the rules around spousal inheritance have not changed, and therefore, inheriting spouses will not be subject to the 10-year distribution rule.
- Your children: they will be subject to the 10-year distribution rule and assessing your options (or, at the very least, getting a realistic picture of what inheritance as-is looks like) is probably a wise choice.
- A retirement trust: retirement trusts are typically established to serve as “see-through” trusts, which are designed to stretch the distributions for all beneficiaries to the age of the oldest inheritor. They rely on the old required distribution rules; therefore, some of the languages within them doesn’t make sense under the new SECURE Act. If you have a retirement trust as a beneficiary of your IRA, you should talk with us and with your estate planning attorney to see if an update is necessary.
This is upending what I thought I had sorted out. What are some of my options?
As with all financial planning issues, your decision shouldn’t be made in a silo. It will have a ripple effect on the rest of your plan. For a holistic look at the legacy you’re leaving, it can be helpful to schedule a meeting with your CFP® professional, attorney and tax advisor to talk through your options and how they impact each area of your plan. Here are a few ideas for discussion:
- Weigh the pros and cons of liquidating your IRA over your lifetime. This means you would be paying the taxes, but if you need the income to live on, and your IRA and tax bracket are on the smaller side, it may be worth looking into. We’ve been doing this with a number of our client families for years, but the SECURE Act makes the consideration all the more valuable.
- Weigh the pros and cons of converting your traditional IRA to a Roth. With this strategy comes the same tax burden as above, but could be a good fit if you don’t need the distributions to live on. The drawback is, if you don’t need the income, you’re likely enjoying cash flow from some other hard-earned source, such as a pension or Social Security. This limits the amount you can convert without pushing you into uncomfortable tax territory.
- Leave your taxable account(s) to your kids. Not new to the SECURE Act, but leaving assets in a brokerage account means that they will enjoy a step-up in basis upon your demise, essentially erasing the income tax liability associated with the inheritance.
- Charitably minded? Leave your Traditional IRA (or some portion of it) to your charity of choice. Also not new to the SECURE Act, but even more important than before: if you have a charitable heart, you could consider naming your charity of choice as an IRA beneficiary. The tax liability disappears once received by the 501(c)3.
- Review life insurance options. Life insurance may be a way to meet your legacy plans without the burden of income or estate taxes for your heirs. As with all insurance products, we highly recommend you run this idea past us for objective, fiduciary-driven feedback before you meet with an agent.
How will the SECURE Act impact my required distributions?
Under the prior law, the IRS required you to take distributions from your Traditional IRA on an annual basis starting at your age 70.5. If (and only if) you turn 70.5 after 12/31/2019, you can wait until age 72 to begin required distributions.
If you happen to turn 70.5 next year, you can still gift via qualified charitable distribution from your Traditional IRA, up to $100,000/year, even though you won’t be subject to required distributions until 72. Utilizing QCD’s has shown to be an excellent way to both meet charitable intent and keep taxable income down. This is particularly useful with the recently doubled standard deduction and SALT limits, the combination of which removed the benefits of itemizing for some taxpayers.
What if you turned 70.5 in 2019? Do you have to take an RMD in 2020? Yes. You’re under the old rules and have to take your required distributions in 2020 and beyond as you always planned.
There are many other details to the SECURE Act, including changes to employer plans, IRA contributions and more. These are just the highlights that we predict will most heavily impact our client families. If you have further questions about the SECURE Act, we hope you’ll reach out. It’s our pleasure to team up with you to understand the opportunities and challenges that legislative changes like this present.