TAX NOTIFICATION: Retirement Planning Revamped Under The SECURE Act


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By Sasha A. Klein

Happy New Year!!  In the tax world, it wouldn’t be a New Year without tax legislation impacting your planning. Welcome to 2020 and with it, new significant tax legislation that may have a meaningful impact on your retirement planning.

What’s important to know? 

NAME: The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE” Act) was signed into law on December 20, 2019.

EFFECTIVE: The SECURE Act is effective January 1, 2020.

CHANGES: The Most Notable Changes to Retirement Planning under The SECURE Act:

  • Elimination of the “Stretch” IRA. Elimination of the ability to “stretch” certain inherited retirement accounts over a designated beneficiary’s life expectancy.
  • Raises RMD Age. Raises the age at which required minimum distributions (RMDs) must begin from the year the taxpayer attains age 70 ½ to 72.

NEW LAW: Under the SECURE Act:

  • “10-Year Rule”. An IRA must be distributed by December 31 of the 10th year following the year in which the retirement account owner dies. Designated beneficiaries can no longer “stretch” an inherited IRA over their lifetime.
  • Exceptions to the 10-Year Rule if the IRA designated beneficiary is:
    1. a surviving spouse
    2. a disabled or chronically ill person
    3. the child of the decedent who is younger than 18 years of age until the child attains 18 and then the 10-year rule applies (exception does not apply to grandchildren)
    4. an individual who is not more than 10 years younger than the decedent
    5. IRAs that have already been inherited should be grandfathered, and thus free from the SECURE Act new requirements

NO CHANGE TO “5-YEAR” RULE.

  • No designated beneficiary (i.e., if the beneficiary is a charity or certain trusts that do not qualify as a designated beneficiary) = “5-Year” Rule.
  • Law Still in Effect After the SECURE Act – An inherited IRA with no designated beneficiary is ineligible for stretch treatment (both lifetime and now 10-year rule). Such inherited IRA is subject to an accelerated withdrawal period of 5 years.

EXAMPLE Illustrating the impact of the 10-Year Rule:

  • Under old law:
    1. Joe, a 21-year-old designated beneficiary, has a life expectancy of 62.1 years. Joe inherits an IRA worth $2 million. Joe’s first RMD would be $32,206 ($2 million divided by the 62.1 years).
    2. Jennifer, a 50-year-old designated beneficiary of an inherited IRA has a life expectancy of 34.2 years. Jennifer inherits an IRA worth $2 million. Jennifer’s first RMD would be $58,480.
  • Under the SECURE Act, both Joe and Jennifer would be subject to the 10-Year Rule instead of the 62.1 years in Joe’s case and 34.2 years in Jennifer’s case.

ACTION ITEMS/STRATEGIES:

  • Revisit your IRA Beneficiary Designations
  • Revisit your Estate Plan
    1. Specifically, review any trusts created under your estate plan that are named as beneficiaries of an IRA, because of the elimination of “stretch” treatment for an inherited IRA regardless of qualification as a “designated beneficiary”.
    2. Two types of trusts qualify – Conduit and Accumulation Trusts. Conduit trusts have been more popular but may be a less worthy choice now. Ensure your estate plan is utilizing the correct one for you.
  • ROTH Conversion
    1. Converts taxable retirement accounts into an account where growth and distributions are income tax fee. However, the amount in the IRA is taxed at current ordinary income tax rates in the year of the conversation.
    2. It is best and most impactful if you can use funds outside of the IRA to pay the accelerated income tax. If you must use IRA funds, the benefit of the conversion is reduced.
    3. Have to run the numbers.
  • Life Insurance Planning Opportunities
    1. Replace lost retirement plan growth, because of the IRA conversation or taxes.
    2. Use larger taxable IRA distributions resulting from the 10-Year Rule (instead of the ”stretch”) to fund life insurance premiums in order to replace assets.
  • Charitable Giving
    1. Direct Gifts. With the elimination of the “stretch”, there is even more value now in shifting charitable gifts from other sources (e.g., wills, trusts and lifetime gifts) to Traditional (non-ROTH) IRAs.
    2. Charitable Remainder Trusts (CRTs).
      • A CRT is exempt from income tax. By using a CRT, taxable distributions can be made over a beneficiary’s lifetime (instead of the 10 Year-Rule).  Then upon the beneficiary’s death, the balance of the IRA can be distributed in a lump sum to the charity income tax free.
      • The CRT also provides asset protection to the beneficiary. However, it is important to remember that the assets ultimately must pass to a charity (though that can include a Family Foundation).

Sasha A. Klein focuses on private wealth services at Ward Damon and counsels affluent individuals and families in personal tax and estate planning.  She advises on structuring wealth to achieve client goals including protecting against risk and minimizing income, estate, gift and generation-skipping transfer taxes.  She also advises the firm’s fiduciary litigators on tax, trust and estate matters.  For questions about the new tax legislation, contact Sasha at Sasha@warddamon.com or call 561-842-3000.

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