The Setting Every Community Up for Retirement Enrichment Act of 2019 or the SECURE Act, was set into law on January 1, 2020. The Act changed many of the long-standing rules about Individual Retirement Accounts (IRAs). The new rules that went into effect include:
- Increasing the age for withdrawing required minimum distributions (RMDs) from retirement accounts from age 70 1/2 to age 72.
- Eliminating the previous age restrictions for contributing to traditional IRAs.
- Eliminating the ability of most non-spouse beneficiaries to ‘stretch out’ the RMDs on inherited retirement plans
The elimination of the “stretch out” is what we find most concerning. Traditionally, at the age of 70 1/2 people were required to begin withdrawing funds from their retirement plan(s). The withdrawal amount was based on a hypothetical person that the IRS has set to live to the age of 102 (most often referred to as “life expectancy”). This age is used with the expectation that most individuals will not live to reach 102 years old, and thus should not run out of money in their retirement account. Any RMD from the retirement account is taxable income. The closer your ages gets to 102, the lower your anticipated life expectancy. The result is that larger RMD withdrawals were required, and a larger tax collection by the IRS on that withdrawal.
For married couples, at death these accounts pass to the surviving spouse, and are taxed to them. For individuals who leave their accounts to their children, or a beneficiary who is significantly younger in age, the beneficiary would have a longer life expectancy which results in a smaller RMD. This creates a smaller tax collected by the IRS. The math worked in favor of the beneficiaries, allowing the money to “stretch” across their life expectancy, and sometimes across generations.
The IRS, as you are painfully aware is in the business of collecting money. The “stretch out” limited the amount that could be collected. The SECURE Act eliminates the ability to “stretch” the funds of a retirement account inherited by younger beneficiaries. As of January 1, 2020, the funds within the IRA will have to be completely withdrawn by these younger beneficiaries within ten (10) years of inheriting! For some clients with large retirement plan balances, this new 10-year rule may impose an ENORMOUS tax burden for their children or loves ones.
Many estate planners drafted “conduit trusts” for their clients. These trusts were a way of providing protections and tax savings for beneficiaries. The SECURE Act has the potential to create a time bomb for those trusts. It is more important than ever to have your plan reviewed to ensure that your family stays protected, and that they are paying the taxes that are most advantageous for them.
There are also solutions for the loss of the “stretch-out”. Working with a qualified estate planning attorney will afford you and your family the opportunity to look at a variety of options to re-create distributions that “stretch” over a longer period than the 10-year rule allows. It also gives you the opportunity to learn about and implement new tax savings measures that allow your family to be protected from creditors and predators while saving significant taxes.
The time to act is now!
If you have any questions or need guidance in your planning or planning for a loved one, please don’t hesitate to contact our St. Charles, Missouri office.