Estate Planning and the SECURE Act
On January 1, 2020, the “Setting Every Community Up for Retirement Act of 2019” (the “SECURE” Act) went into effect. This Act ushered in the first major retirement reform in over a decade. The Act makes substantial changes to the rules governing retirement accounts, including IRAs and 401(k)s, which affect account owners and beneficiaries of those accounts.
- The age for Required Minimum Distributions is now age 72. Participants will no longer be required to withdraw assets from their retirement accounts at age 70 ½.
- The Act eliminates the maximum age cap (70 ½) for traditional IRA contributions.
- The Inherited “Stretch IRA” is eliminated. SECURE replaces the life expectancy payout with a 10 year payout (unless the beneficiary is a surviving spouse, a minor child, is disabled and chronically ill, or a beneficiary who is less than 10 years younger than the deceased participant).
Estate Planning and the SECURE Act: Many of our clients have designated their children as primary or contingent beneficiaries (after the death of their spouse) of their retirement accounts with the goal of “stretching” the IRA out over the lifetime of their children and providing children with a source of income. The new 10 year payout rule for Inherited IRA’s will accelerate the payout of the IRA and may push the beneficiary into a higher income tax bracket resulting in increased taxes.
In the past, we may have recommended to a client who was concerned about a beneficiary receiving an Inherited IRA outright upon their death (due to the age, disability or financial indiscretion of the beneficiary) to establish a trust and designate the trust as the beneficiary of their IRAs. However, our recommendations may now change since the SECURE Act requires a 10 year distribution period for trust beneficiaries. The Trustee is not required to pay out all of the IRA to the beneficiary within 10 years (unless mandated by the trust agreement), and the Trust may accumulate the IRA distributions in trust for the beneficiary, but the Trust will have to pay the income tax on the IRA distributions over the 10 year distribution period. The income tax bracket for trusts are compressed. Trusts are taxed at the highest marginal income tax rate (37%) once trust income exceeds $12,950. Thus, the Trust may pay out more in income taxes on the Inherited IRA distribution than if the IRA named an individual as a beneficiary.
If you have named a Trust as a beneficiary of your IRA or retirement account, or if are concerned about an individual beneficiary receiving an Inherited IRA on an accelerated basis over 10 years, please contact the firm to discuss your estate plan, trusts and options for your IRAs.