What The New SECURE Act
Means For You
Good Morning Relaxing Retirement Subscriber,
We begin the new year with the passage of The SECURE Act, which is the first major retirement income bill in over a decade.
While there are many provisions of the new law, the bottom line is an increase in taxes for your family when they inherit your IRA.
There is an important step I recommend you taking as soon as you’re able if your trust is currently the beneficiary of your IRA.
Before we jump into that, let me break down the four most important implications of the SECURE Act for you:
- IRA Required Minimum Distribution (RMD): The age at which you must begin to withdraw funds from your IRA and pay taxes has been increased from 70 ½ to age 72. If you were younger than age 70 ½ on December 31, 2019, you can now wait until the year in which you turn age 72 to begin your RMD. For example, if your birthday is July 4th, 1949, and thus you turn 70 ½ after December 31, 2019, you may now wait until age 72 (2022) to begin your RMD.
- Qualified Charitable Distributions (QCDs): In the last few months of the year, we discussed an opportunity for those who have begun taking their RMD from their IRA to make charitable donations directly from their IRA (QCD) to lock in the tax benefits of donating. The good news under The SECURE Act is that you do not have to wait to age 72 (the new RMD age) to take advantage of this benefit. You may still begin in the year in which you turn age 70 ½.
- IRA Contributions: Up until now, once you reached age 70 ½ and began your RMDs, you could no longer make contributions to your IRA or Roth IRA. That limitation has now been lifted. However, you must still have earned income in order to make a contribution. An example of this is someone who is still earning income consulting at age 74. Although they have to take their Required Minimum Distribution (RMD) from their IRA, they may offset the negative tax impact by still making tax deductible contributions to their Traditional IRA.
- Inherited IRAs (“Stretch” Provision): For years, we have discussed the large tax bill awaiting your kids when they inherit your IRA if they don’t handle it properly. The solution to the large one-time tax hit was re-titling your IRA to an Inherited IRA at your death which allowed any non-spouse beneficiary (kids, grandkids, etc.) to stretch out their tax bill by taking small required annual withdrawals over their entire lifetime. So, if your daughter was 42 years of age, she could spread out her tax liability from taking withdrawals from your IRA over her life expectancy of well over 40 years.
That strategy has now been severely limited by requiring your IRA to be fully distributed within 10 years of your death. The result of this is your children will face higher income tax bills from the requirement to take larger taxable distributions.
This requires some more extensive planning on your children’s part because they can stagger their withdrawals. If they have a large income year personally, they may choose to push off taking a withdrawal from your IRA in that calendar year as it would likely be taxed at a higher rate. As long as the IRA has been emptied out by the end of the 10th year, they have fulfilled the requirement.
If you strongly believe that you will not spend down your entire IRA during your lifetime, and you don’t want the larger tax burden placed on your children, another strategy to consider is converting portions of your IRA to a Roth IRA each year during your lifetime, thus pre-paying the taxes your kids will eventually have to pay.
**The final key point I mentioned earlier applies to anyone who currently has a trust as a beneficiary or contingent beneficiary of their IRA. Trusts designed with “pass-through” language to accommodate your kids’ ability to use the Inherited IRA strategy likely need to be updated to match SECURE Act language. If not, the existing language could restrict IRA beneficiaries’ access to funds which could create substantial tax bills.
I strongly recommend reaching out to your estate planning attorney and asking two questions:
- Given the new SECURE Act, do you still recommend that we have our trust as the beneficiary (or contingent beneficiary) on our IRA?
- If so, is the language in our trust in line with the requirements of the SECURE Act so that my children have full freedom to take advantage of Inherited IRA (Stretch) strategies?
We will have more to add on this new law, but if you have any questions in the meantime, please don’t hesitate to reach out.
Happy New Year!
Committed to Your Relaxing Retirement,
The Retirement Coach
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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)