The SECURE Act: The Good, the Bad, and the Ugly
By Paul F. Ciccarelli CFP®, CHFC®, CLU®
In the final weeks of 2019, Congress passed its second major tax and retirement law in the past 24 months. The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) affects many areas of retirement and income tax planning. The most notable change resulting from the SECURE Act is the elimination of the “stretch” provision for most, but not all, non-spouse beneficiaries of an inherited IRA and other retirement accounts. Under previous law, non-spouse beneficiaries could exercise more control over their taxes by taking distributions from an inherited IRA or retirement account over their life expectancy. This served to preserve wealth by deferring the tax bite for the next generation and managing these portfolios within a non-tax reportable IRA umbrella. The modus operandi for most attorneys, CPAs and financial planners was to position their client’s beneficiary arrangements to provide this “stretch” option to their children and grandchildren, either directly or from within their revocable trusts.
Under the new law, with few exceptions, non-spouse beneficiaries must withdraw all of the retirement accounts inherited within 10 years of the death of the IRA owner. There is no required minimum distribution until the 10th year when all must be distributed. Each year the beneficiary would have to add withdrawals on top of their normal taxable income. In the case of a large retirement account inheritance, this is likely to push them into a higher tax bracket.
It could be even more significant if you have named a trust as beneficiary of your IRAs and retirement accounts. In some cases, perfectly drafted trusts that were designed to inherit IRA and retirement accounts under the old law may create a tax disaster. Under commonly used trust language, the beneficiary may not be able to take a distribution until the 10th year. They would have to take the full value and pay taxes on the entire amount all at once.
If you have significant IRA and retirement assets, you will want to meet with your financial planner, attorney and CPA to review all of your beneficiary arrangements. Trusts can still be used, and in some cases may be the best plan given your and your family’s circumstances. However, you may need to make certain that the language is correct.
Make no mistake, the new law is designed to generate revenue by collecting taxes from the next generation of beneficiaries. This law has very little effect when planning for leaving IRA and retirement assets to your spouse. There are some exceptions, which we will discuss at our Symposium on February 5th at Grey Oaks. In general, however, taxes will no longer be deferrable over the life expectancy of a child or grandchild.
Several “new” planning opportunities rise up to help protect family wealth under the new law. These may include:
Converting to a Roth IRA
A Roth IRA, unlike the traditional IRA, is funded by after-tax dollars and remains tax-free for account holders and their beneficiaries. The inherited Roth IRA must be fully withdrawn by the end of the tenth year after the decedent’s death, but unlike the inherited traditional IRA beneficiaries will not pay income taxes on the withdrawals.
Naming a Charitable Trust as Beneficiary
For individuals and families that are charitably inclined, this planning might make sense and could provide a very similar “stretch” experience for future generations. By naming a Charitable Remainder Unit Trust (CRUT) as the beneficiary of your retirement plans, and naming children and/or grandchildren as income beneficiaries of the trust for a 20 year term or their lifetime, you eliminate the effect of the 10 year rule. At the owner’s death, the Traditional IRA and retirement assets pass to the CRUT income tax free. The CRUT then pays income to the family annually or more frequently.
Purchasing Life Insurance with Required Minimum Distributions
For individuals that have large IRA and retirement assets and are forced to take required minimum distributions (RMDs) each year, whether they need the income or not, this idea may be beneficial. If RMDs are not needed for current cash flow, life insurance may be purchased within an irrevocable life insurance trust. If both husband and wife are alive, a survivorship life policy could be most efficient. At the surviving spouse’s death the insurance policy pays out an income and estate tax free death benefit, replacing what could be a 40% income tax hit on the retirement assets.
Each of these planning ideas have been simplified, but they can be used as a starting point for you and your advisor to discuss in more detail.
To learn more, please plan on joining our February 5th program for a more in-depth look at the good, the bad and the ugly of the SECURE Act and how it may affect you and your family.
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.