“SECURE” your IRA –The New Rules, and How SECURE Impacts Your Estate Plan

Retirement Accounts are a part of every estate plan, which is designed with these accounts' Rollover and Tax Deferral strategies in mind. However, these rules have now changed, which begs for an Estate Plan review, to ensure the long-term planning goals remain reachable under the new rules.

On January 1, 2020, the SECURE Act came into effect. SECURE is an acronym for the “Setting Every Community Up for Retirement Enhancements Act.” Here are the main implications of the SECURE Act on retirements accounts and your Estate Plan:

1. Elimination of the Stretch IRA. Prior to SECURE, an IRA beneficiary was able to roll over and withdraw an inherited IRA over that beneficiary's life expectancy. This was known as the “stretch” rule. Under the SECURE Act, this timeframe has been shortened to ten (10) years, with limited exceptions available to the account owner's surviving spouse, disabled beneficiaries, chronically ill beneficiaries, minor beneficiaries (deferral is only allowed through age of majority, then the 10 year limit starts), and beneficiaries who are no more than 10 years younger than the deceased account owner. Those new rules will apply to folks who die after December 31, 2019.

The new 10-year time limit on distributions of inherited IRAs is estimated to put into circulation approximately $15.7 billion dollars through 2020 (according to the Joint Committee on Taxation). The rationale behind this is that retirement accounts should be used mainly for the owner and spouse's retirement needs, rather than as a wealth-succession tool.

The elimination of the Stretch IRA is the most significant change that prompts review of Estate Plans. Previously, the IRA accounts were the “last resort” for a beneficiary to tap into, with brokerage accounts and life insurance proceeds being the first “go-to” inherited asset to cash out. This expectation is now (in many cases) reversed. As such, a conversation with your Financial Advisor will be a wise next step to address possible restructuring of one's investments among IRAs, Roth IRAs, Brokerage Accounts, Life Insurance Policies, and Savings Accounts.

Another consideration to be discussed with your financial advisor is to revisit the Beneficiary Designations on IRA accounts and consider the above noted exceptions (especially, naming a spouse as a beneficiary).

The next obvious consideration are the tax implications of forcing distribution of IRA accounts over only a 10 year period, especially where the named beneficiaries are very young, whereby the beneficiaries would likely be cashing out IRAs at the peak of their own income tax bracket. As such, converting some IRA funds to Roth IRA or Life Insurance Policies (which are distributed free from income tax) could be explored with your financial advisor to minimize the income tax impact on the named beneficiaries.

It is notable that there are no specific guidelines or limits on how the IRA will be distributed over the 10-year period – distributions may be taken monthly, annually, once every few years, or, the entire account may be distributed days before the expiration of the 10-year stretch limit, so as to achieve maximum tax-free growth. Those considerations should be discussed with your CPA and financial advisor. Further, where asset protection is sought, making your living trust the beneficiary of a Life Insurance policy can shelter the death benefit from the beneficiary's creditors, divorce, substance abuse dependence, etc. This protection cannot be extended to an individual IRA beneficiary.

Naming a Trust as an IRA Beneficiary, which is generally done for purposes of creditor and spendthrift protection, can now lead to taxing the retirement account distributions at the higher trust tax rates, without the benefit of the stretch provisions of the past. In the face of the SECURE Act, naming a Trust as an IRA Beneficiary may no longer be in line with the Trust Settlor's long-term estate planning goals, and may lead to unfavorable taxation for the trust beneficiaries.

Those who incorporate philanthropy in their Estate Plans would be wise to shift naming Charities as trust beneficiaries, to naming Charities IRA beneficiaries instead, since the charitable distribution would avoid both income and estate taxes.

1. Required Minimum Distribution (RMD) Age Raised to 72. Prior to the enactment of the SECURE Act, an IRA owner was required to begin withdrawing minimum distributions by April 1st of the year when s/he turns 70. This RMD age has now been raised to 72.

1. Repeal of Maximum Contribution Age. Prior to the SECURE Act, one was not allowed to contribute to a traditional IRA during or after the calendar year in which s/he turns 70. This limit has now been repealed, and tax-deductible IRA contributions can now continue with no age cap, allowing additional time to grow such tax deferred accounts. With more individuals working well into their 70s, this is a welcome change, which adds more time to strategize and reposition the tax deferred versus the non-tax deferred pieces of one's investment portfolio.

The SECURE ACT is a good reminder that with the changing laws, and evolving individual tax and income levels, financial goals and family dynamic, Estate Plans should be reviewed with fresh eyes every few years to ensure that they remains adequate and keep current with the world around us.

Contact us to schedule a review of your estate plan, or if you are in need of a referral to a financial advisor or a tax professional.