On December 20, 2019, the SECURE Act was signed into law. The SECURE Act contains 29 provisions, encompassing many aspects of financial planning and retirement saving. As time goes on, nuances in interpreting this new law will become clearer. Until then, individuals are left to interpret the law’s effects based on the language of the law itself and any guidance the IRS has issued. This article will address what the SECURE Act entails and who it affects, as well as provide suggestions on how to plan for the changes that have been instituted.
Many of the provisions adopted into the Internal Revenue Code as part of the SECURE Act allow individuals more time for tax-deferred savings and growth before distributions are required. The provisions deemed advantageous to individuals and businesses may result in less tax revenue to the government, however. So, the SECURE Act also includes requirements designed to account for this loss of revenue by accelerating the withdrawal and taxation of inherited retirement accounts.
Although there are many ways in which the SECURE Act will change how individuals save for retirement, the provision with the greatest effect is the elimination of the lifetime “stretch” option for IRAs. Prior to the SECURE Act, individual beneficiaries were entitled to stretch out the withdrawal of their inherited retirement account in accordance with their life expectancy. Now, beneficiaries are required to withdraw their entire inherited retirement account within 10 years of the original owner’s death.
There are some exceptions to this rule, however. The individuals who remain entitled to the lifetime “stretch” option include:
In most instances, withdrawal of a beneficiary’s retirement account over a 10-year period (rather than over the course of a person’s lifetime) will result in substantially less tax-deferred growth, as well as more taxes due on withdrawal from the account. To help mitigate the potential negative ramifications of these changes, below are a few strategies to consider when planning for the loss of the beneficiary “stretch” IRA option.
With tax rates at historic lows and uncertainty surrounding their future, it could be a good year to coordinate with a CPA to potentially accelerate Roth conversions, so that beneficiaries may avoid being taxed rapidly on distributions. This is an especially applicable strategy if the beneficiaries are in a higher tax bracket than the account owner.
Alternatively, individuals with legacy priorities may not be motivated to accelerate Roth conversions under the SECURE Act because a grandchild (for example) will not receive the long period of tax-free growth from the inherited Roth.
Going forward, account owners should be sure to ask these key questions before making a Roth conversion:
A beneficiary can “disclaim” or refuse inherited assets without tax implications. A qualified disclaimer must be in writing and submitted within nine months of the IRA owner’s death. In addition, the beneficiary must not have received or exercised control over the property, and the disclaimed property must pass to someone other than the disclaimant.
This may be particularly advantageous for a surviving spouse who does not need access to those retirement funds. By exercising a right to disclaim a portion of the inherited IRA, the ultimate beneficiaries (e.g., the children) would avoid a larger share of assets being distributed over a single 10-year period. In this instance, one 10-year period would commence upon the death of the first spouse and a second would commence for the remaining balance of the account upon the death of the second spouse.
An account owner could consider naming a CRT as the beneficiary of an IRA. These trusts are structured so that a beneficiary would collect a stream of income from the
assets of the CRT for a specified time. At the end of that period, the charity would collect whatever is left. The CRT isn’t taxed on the distribution from the IRA or the income it earns; however, the beneficiary will be responsible for any taxes owed on distributions from the CRT.
Individuals may want to explore whether taking a withdrawal from the retirement account to pay premiums on a life insurance policy is more advantageous than leaving the retirement account to the beneficiaries. Beneficiaries typically receive life insurance money tax-free. Depending on the insurability of the individual, the total death benefit payable to the beneficiaries may exceed what they receive as a beneficiary of an IRA. This analysis should be performed by a qualified financial professional.
If an individual is older than 70½, they are entitled to make taxfree gifts of up to $100,000 per year from their IRA payable directly to a charity. QCDs may become more
advantageous after the SECURE Act because IRAs will become a less attractive inherited asset. Therefore, tax-free depletion of the IRA may be more beneficial than the dissipation of other nonqualified appreciated assets, which could pass to beneficiaries on a stepped-up basis.
Account owners will need to coordinate with their CPA if they are planning to contribute to their IRA after age 70½, as such contributions may affect the QCD treatment.
The SECURE Act decreases the amount of complexity and risk involved in naming a trust as a beneficiary. The cost-benefit analysis of tax deferral versus control of distributions will shift, as the stretch would be no more than 10 years.
It is imperative that individuals who named a trust as the beneficiary of an IRA prior to the implementation of the SECURE Act review their current estate plan with an attorney to determine how the SECURE Act may affect the distributions from the IRA to the trust. In some instances, trusts drafted prior to the SECURE Act may be obsolete, resulting in a distribution pattern that works against the original intent of the trust.
It may make sense for account owners to revise their estate plan to take a more comprehensive “asset-by-asset” approach, rather than to continue splitting assets by percentage. For example, the account owner might earmark IRA assets to be distributed to minors or individuals in lower tax brackets and designate a larger proportion of non-retirement assets to those with higher incomes.
This new legislation will not affect the following individuals:
As more information becomes available regarding the interpretation of the SECURE Act, it’s important that you continue to review all aspects of your financial plan and beneficiary elections to ensure that you understand how you and your family have been affected. Be sure to reach out to your tax professional or contact our office for help navigating your situation.
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Michael Embrescia is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330)954-3770 or at info@emvisioncapital.com.