A. Gary Katz, CBEC
Wealth Preservation Specialist
On December 20th 2019, the SECURE Act went into effect. The Bill will make it easier for small businesses to offer 401(k(s), and to include annuities in retirement accounts. The most important change as we see it, is the abolition of Stretch IRAs, which we discuss below.
The SECURE Act makes numerous changes to retirement as we know it. For starters, the required minimum distribution (RMD) age is increasing from 70 ½ to 72. This is a big change as it allows investors to have another year and a half to build retirement accounts.
As far as new parents go, the SECURE Act will allow them to withdraw up to $5,000 from their retirement plans to cover expenses related to a new baby or adoption without the 10% early withdrawal fee. It also allows withdrawals of as much as $10,000 from 529 education-savings plans for repayments on student loans.
Arguably the biggest change the SECURE Act presents is doing away with the “Stretch IRA’s” for non-spouse beneficiaries. The SECURE Act will no longer allow non-spouse beneficiaries who inherit a retirement account to “stretch” out distributions over the beneficiary’s life when liquidating the account. Instead, the bill requires liquidations within 10 years of the newly inherited account, which inevitably will increase taxes and decrease the value of the inherited IRA. There are a few exceptions, however, such as when the beneficiary is the surviving spouse, disabled or chronically ill, not more than 10 years younger than the deceased IRA owner, or a child who hasn’t reached maturity age.
This restriction on the Stretch IRA shines light on how important advance tax planning is. The need for tax diversification (including Roth IRAs) and creative tax planning could be at an all time high. These strategies include Roth conversions, distribution planning, beneficiary changes, and tax bracket management. Decreasing Traditional IRA balances in favor of Roth IRAs (when possible) will be a huge benefit to beneficiaries who inherit an IRA.
Anyone who has a large IRA balance and is concerned about the after-tax value of the IRA for their beneficiaries should discuss these recent changes with us. The issue is even more acute for a single or surviving spouse with a large Traditional IRA balance.
In addition, we strongly recommend making qualified charitable contributions (QCDs) if you are over age 70 ½. QCDs are direct transfers from an IRA to a qualifying charity of up to $100,000 per year, which has numerous tax advantages. Another action that can be taken, although less popular, is considering naming a charitable remainder unitrust (CRUT) as an IRA beneficiary. This will permit tax deferral over the term of the CRUT, in turn raising value of the account realized by the non-charitable beneficiary.
The passage of the SECURE Act severely curtails the use of Stretch IRAs, which calls for advanced tax planning so that your assets are best protected. Any client with a large IRA balance who is interested in leaving an inheritance to their children – and has concerns about changes – can act with us.
Please contact us should you have any questions.