The SECURE Act that went into effect January 2020 contained two major provisions affecting everyone’s estate plan. It stemmed on a congressional desire to marshal in needed tax revenue under the premise that retirement accounts are for you, and not your heirs. The first provision is the elimination of the choice for a non-spouse beneficiary to stretch the beneficial value of the account over their lifetime. (Surviving spouses, the chronically ill, disabled or not more than 10 year younger than the decedent are exempt from the new rules.) All plan assets have to be withdrawn by the end of the tenth year after the year of death. Assets can be drawn in any fashion desired as long as the account is emptied out and terminated within the ten-year pay down period. No longer can a parent or grandparent bequeath to a child or grandchild an IRA account designed to benefit them over their lifetime. The new rules do allow for a minor child to “stretch” the distributions out, but only until they reach the age of majority (or 26 if in college) when they then face the ten-year pay out rule. The ramifications of this are many: namely there is the higher tax implications; not only on the inherited asset but all income reported by the beneficiary in the year of distribution. Secondly, there is the unintended emotional and psychological impact of taking constructive receipt of large amounts of assets. The SECURE Act obliterated IRA trust planning; rendering them subject to the new rules. Many a parent with a sizable IRA account may have created either a Conduit or Discretionary IRA Trust for specific reasons. Most commonly the parent/grandparent does not want the named beneficiary(s) to squander the money or mismanage the assets, and for the assets to be protected from future marriages, divorces, lawsuits or financial predators. If the trust verbiage states that the beneficiary is only to receive the RMD each year, since RMDs no longer apply (in this situation) the beneficiary would receive one giant lump sum at the end of the tenth year. IRA trust owners face verbiage amendments or retraction; neither being a winning solution as they watch their financial investment in money and effort culminate to disappointment. There are other options for the masses who would not incorporate IRA trusts into their planning such as: changing the beneficiary to a spouse to defer the ten year start date, or converting the assets to a ROTH IRA making the inheritance tax free, using a pre-determined beneficiary payout option on a variable annuity or even creating a life insurance trust which offers dually post death control and elimination of taxes to the beneficiary. Seeking the insight and advice of an astute CFP® is recommended before any of these approaches are implemented.
The second provision is twofold: for those born on or after July 1, 1949 they can delay taking RMDs from their 401(k) or IRAs until they turn 72. That offers two extra yeas of tax-deferred growth. There was also the repeal of the maximum age for making IRA contributions. Currently the age is the day a person turned 70 ½. People are living longer and some are working into their 70s. People with earned compensation can continue to contribute to their tax advantaged retirement plans sponsored by their employers, or in individual IRA accounts or even SEP-IRA accounts.
