The SECURE Act’s Planning Impact: OPPORTUNITIES

The SECURE Act’s Planning Impact: OPPORTUNITIES

The SECURE Act, signed on December 20, 2019 and the law of the land since January 1, has brought sweeping changes to the rules of the retirement planning game.

Most of the new regime is positive, in our view, but a few changes, particularly those limiting the tested stretch-IRA strategy, have brought those inseparable partners, consternation and confusion, to our profession.

The partial elimination of the stretch IRA is linked to the government’s desire to raise more tax revenue – perhaps not an astonishing revelation. The Congressional Research Service estimates the adjustment will allow the IRS to collect an extra $16 billion or so over the next ten years – a useful sum, considering its limited impact on most of the population.

We take a phlegmatic view on taxes overall: we’re enjoying the current low-tax environment, but understand the government needs to find financing somewhere. We concede this is little comfort to clients who’d looked forward to their heirs enjoying the benefits of the stretch IRA.

In the new reality, if you had plans to pass your IRA on to heirs, we counsel an early conversation with your financial advisor. It may still make sense to maintain your post-partem inheritance plans, but Plan B is likely in the offing.

To recap, the traditional stretch IRA has been eliminated for most people. In earlier years, you could leave an IRA to a beneficiary, who could then stretch the RMDs over their actuarily defined life expectancy. This offered the recipient a nice income boost with little chance of what the industry-savvy call a ‘tax event’ – that is, getting jolted into a higher tax bracket, not something most people would willingly do to a loved one.

Under the SECURE Act, a beneficiary will have ten years to empty the IRA account. There is no RMD: the withdrawal requirement can be satisfied steadily over the mandated decade, all at once, at the last minute, or in any convenient way, just so long as the account is fully drained after ten years. Failure will result in the funds being dumped into the heir’s lap at the deadline, making an encounter the ‘tax event’ monster a near certainty.

There is good news: certain categories of inheritors, identified as “eligible designated beneficiaries” under the Act, can still employ the stretch IRA strategy. These include a surviving spouse, beneficiaries no more than ten years younger than the original account holder, children younger than majority (but only until they reach age 18), certain categories of disabled recipients and beneficiaries defined as chronically ill under the Act.

If you’ve established a conduit or “pass-through” trust, it is essential to examine the exact language to ensure it meets the SECURE Act’s dictates. Failure to comply could hamstring a beneficiary’s ability to freely withdraw the funds, potentially leading to that painful tax bill. Rewording any pass-through trust agreements to allow the free use of funds is now essential if you wish to avoid any postmortem pain for your heirs.

Roth IRA conversions are a good potential response to the new regime. Individuals or married couples who intend to leave retirement accounts to heirs should begin switching qualified accounts into Roth IRAs early on, as the maximum annual contribution limit is quite low – only $6,000 this year. We counsel a conversation with your estate planner soon to consider all of the variables, and the many other ways to painlessly leave retirement accounts to deserving heirs and charitable causes. Whatever the case, dumping a tax burden onto inheritors is probably the last thing on your mind, so tarry not.

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For more information, please read:
Retirement and Estate Planning Opportunities after the SECURE Act | Kiplingers

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