The SECURE Act which stands for “Setting Every Community Up for Retirement Enhancement” is shaking up traditional strategies concerning retirement distribution planning in both good and bad ways. For many, the SECURE Act could easily stand for: “Screwing up Estate planning for Children thanks to Unnecessary Regulatory Excess.” Although this law has some positive aspects, where it concerns estate planning and taxation, the positives come at a significant cost.
The highlights of the SECURE Act include the following:
- Delay of Required Mandatory Distribution from age 70 ½ to age 72.
- If you have earned income, you may contribute to your IRA after age 70 ½.
- Adoption/ birth expenses qualify for penalty-free (but taxable) withdrawals of up to $5,000 per parent.
- Company retirement plans are now accessible for those working more than 500 hours per year (versus 1,000) for at least 3 consecutive years.
- Small businesses may join group plans to form multi-employer plans to pool resources and share costs of offering retirement plans for employees.
The cost for all of the above? RIP, the Stretch IRA for the majority of non-spousal beneficiaries. The law allows the Stretch IRA to remain for “eligible designated beneficiaries” (EDB’s) including:
Surviving spouses, minor children (not grandchildren) up to the age of majority, disabled individuals (under strict IRS definition), chronically ill individuals and individuals not more than 10 years younger than the deceased IRA owner (generally siblings near the same age).
The new law (for all other non-eligible designated beneficiaries) allows for a 10-year rule. Under this rule, the only provision is that that the entire IRA balance must be emptied by the end of the 10 years. This does offer flexibility by not requiring an immediate annual withdrawal over the life-expectancy of the beneficiary. However, it also eliminates the ability to create Trusts with minimal withdrawal provisions, which would be advantageous to the beneficiaries over their lives and subsequently the lives of their own beneficiaries.
A well-known IRA expert feels that the elimination of the Stretch-IRA for all but the EDB’s and IRA owners with “large to extra-large” balances in retirement assets, will require a major overhaul in their current estate plan.
Why? Because large to extra-large balance IRA’s are often left to trusts for protection and preservation purposes. The benefit being that only Trusts offer the account owner’s “control beyond the grave” in regard to the disposition of assets. The old rules allowed these inherited IRA funds to be protected, possibly for decades. Trusteed IRA’s are conduit trusts and will no longer work under the new laws. If these funds continue to be held in a trust, they will be subject to the much higher tax rate associated with these trusts. The current 2020 Trust tax rates show that income over $12,950 is subject to a 37% federal income tax rate.
There are potential solutions and planning opportunities available to counteract the “death of the Stretch-IRA” for non-eligible beneficiaries. Please evaluate your situation and contact your financial adviser in conjunction with the attorney who drafted your estate plan to plan or revise your plan accordingly.