How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing some of the high-level changes from this piece of legislation.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our fourth of six installments on stretching IRA distributions.

One of the major changes from the SECURE Act was the elimination of the ‘stretch’ IRA, which allowed beneficiaries to take retirement account distribution over their lifetime to spread out the income.  While a limited number of beneficiaries still have this option (see blog article referenced above), the act has replaced this option for the vast majority of beneficiaries with a new 10-year payout rule, requiring the retirement account to be emptied by the end of the 10th year following the year of death.  This will significantly shortening the distribution period on those retirement accounts and require the beneficiaries to recognize income more quickly than they would have had to do before.

Now that the stretch has been eliminated for IRAs, are there other options for my beneficiary to receive the income over a period longer than 10 years?

Since the law is only a few months old, new strategies are still being considered to address the compressed distribution schedule for non-spouse beneficiaries. A few strategies have gained traction, but they require intentional actions by the account owner before a death occurs. They include:

  • Designating a charitable remainder trust as the beneficiary on the IRA. The CRT can pay a lifetime income stream to a person (or persons) of the IRA owner’s choice, but any residual balance will be retained by the charity. This option works best for owners who are already charitably inclined.
  • Consider tactical bequests. For example, leave Traditional IRAs to spouses (since they still have the stretch distribution options) or to charity (since they don’t pay taxes, so the compressed distribution won’t matter to them) but leave Roth IRAs, after-tax accounts, or real estate assets to non-spouse beneficiaries.
  • Take larger IRA distributions during your lifetime to purchase life insurance which can be paid to a trust. Since the life insurance proceeds are post-tax assets, there would be no time requirement on the trust distribution. The trust can even be set up as an Irrevocable Life Insurance Trust to keep the insurance proceeds out of the decedent’s estate if federal or state estate taxes are a concern.

Each of these strategies require careful consideration but can potentially provide your beneficiaries with income beyond the next decade.  We recommend speaking with your financial advisor or estate planner if you think any of these strategies may be appropriate for you.

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act

Fifth Installment: The SECURE ACT: Important Estate Planning Considerations

Sixth Installment: Inheriting an IRA? New Rules to Consider

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

How does the CARES Act impact me?

How does the CARES Act impact me?

 Written by: Matt Mathiesen & Phuc Dang, CPA, CFP®

With news about the Coronavirus Aid, Relief, and Economic Security (CARES) Act, people across the country have been wondering what might be contained in the almost 900 pages of legislation. While we can’t cover every provision of the new law, this post highlights some of the sections that will have the biggest impact for individual taxpayers.

Looking specifically at how the $560B dollar portion of the $2T dollar legislation will benefit individual taxpayers during this pandemic, here are the broad highlights for you to consider:

 

“Advance” rebate payment

An “advance” rebate payment of up to $1,200 per adult and $500 per child under 17 will be sent out to households. There are income limits that will start phasing out the rebate base on your adjusted gross income and filing status.

 

These payments are based upon either 2019 (if already filed) or 2018 tax return data. If you don’t receive a rebate payment now due to high income on your prior return, you may still be eligible for a refundable credit on your 2020 tax return if you qualify based on your 2020 income.

You can find out more information about the rebate payment on the IRS website.

 

RMDs are no longer required for 2020

For individuals in their RMD stage – RMDs for all retirement accounts and Inherited IRAs are no longer required for 2020. You may be able to return already distributed RMDs (except from Inherited IRAs) taken within the last 60 days. There are specific steps required to ensure it is done properly, so be sure to consult your advisor.

 

Additional options to use retirement assets to help cover expenses

There are some additional options available to tap retirement assets to help cover expenses. It’s important to note, that some are only for Individuals impacted by the Coronavirus. This is someone who:

  • Has been diagnosed with COVID-19,
  • Has a spouse or dependent who has been diagnosed with COVID-19,
  • Experienced adverse financial consequences from being quarantined, furloughed, being laid off, or having work hours reduced because of the disease,
  • Is unable to work because they lack childcare as a result of the disease,
  • Owns a business that has closed or operate under reduced hours because of the disease, or
  • Meets some other reason the IRS decides is considered impacted.

Impacted individuals can withdraw up to $100,000 in 2020 with modified rules

  • These distributions are not subject to 10% early distribution penalty or mandatory withholding.
  • The taxes on these distributions can be spread evenly over three years.
  • The distributions may be repaid to the retirement account within three years to reduce or eliminate the taxable income.

The retirement plan loan limit increased from $50k to $100k for all borrowers

  • 100% of the vested balance can be used for the loan up to the $100k maximum.
  • Payments on the loan can be delayed for up to 1 year.

Unemployment benefit changes

For individuals who are filing for unemployment, unemployment benefits now start in the first week of the claim. Unemployment Compensation is increased by $600 per week via federally funded dollars, for up to 4 months of claims. Unemployment Compensation is extended for 13 more weeks in addition to what one would normally be eligible for under state law.

 

Federal student loan changes

Required loan payments are suspended through September 30, 2020 and no interest will accrue during this period. The suspensions are not automatic; borrowers should contact their loan provider to pause payments.

 

The pandemic has caused financial hardship for many Americans, and the CARES Act is only the latest in what is sure to be an ongoing battle to help people and businesses get back on their feet. At Merriman, we are dedicated to staying on top of the ever-changing landscape to help your family make the best financial decisions. Please reach out to us if you would like to discuss how any of the above provisions may affect you.

 

What The SECURE Act Means For You

What The SECURE Act Means For You

 

You may have heard about the significant tax and retirement reforms recently signed into law under the catchy name Setting Every Community Up for Retirement Enhancement (SECURE) Act. These sweeping changes were drafted to promote increased retirement savings by expanding access to retirement savings vehicles, broadening options available inside retirement plans, and incentivizing employers to open retirement savings plans for their employees.

Some of these changes have a much wider impact than others, but here is a summary of the key takeaways and provisions of the SECURE Act most likely to affect you.

The age to begin required minimum distributions (RMDs) increased from 70 1/2 to 72. The later RMD age of 72 will only apply to those turning 70 1/2 in 2020 or later. Anyone who turned 70 1/2 in 2019 will still be subject to the original RMD rules. While not a huge delay, individuals could benefit from an extra year and a half of compounding returns if they choose not to withdraw funds from their Traditional IRA. It can also provide additional time to make strategic Roth conversions while in a lower tax bracket. It is important to point out that the Qualified Charitable Distribution age has not changed, so QCDs can still be made starting at age 70 1/2.

The maximum age to contribute to a Traditional IRA has been removed. You may now contribute to a Traditional IRA even if you are over 70 1/2. This is a great benefit to those continuing to work into their 70s, as contributions to a Traditional IRA are tax-deductible. After your RMDs have started, continued contributions allow for an offset of the taxable income realized from these required IRA distributions.

The Stretch IRA rule, allowing non-spouse beneficiaries to “stretch” distributions from an Inherited IRA over the course of their lifetime, has been eliminated. This provision, enacted as the funding offset for the bill, requires that non-spouse beneficiaries distribute all assets from an Inherited IRA within 10 years of the account owner’s passing. Spouses, chronically ill or disabled beneficiaries, and non-spouse beneficiaries not more than 10 years younger than the IRA owner will still qualify to make stretch distributions. Minor children will also qualify for stretch distributions, but only until they reach the age of majority for their state (at which time they would be subject to the 10-year payout rule). These new rules only apply to inherited IRAs whose account owner passed away in 2020 or later.

This change will have the most significant impact on adult children inheriting IRAs, who now will have to recognize income over a 10-year period instead of over their lifetime. For those still in their prime working years, this may mean taking distributions at more unfavorable tax rates. Trusts named as IRA beneficiaries also face their own set of challenges under the new law. Many are now questioning whether they should start converting Traditional IRA assets to a Roth IRA, or significantly increase conversions already in play. Unfortunately, there’s not a one-size-fits-all answer to this question. It’s highly dependent on a number of factors, including current tax brackets, potential tax brackets of future beneficiaries, and intentions for the inherited assets. We’ll explore this and additional estate planning concerns and strategies in more depth in future articles.

Here are a few other changes that are worth mentioning:

  • Penalty-free withdrawals of up to $5,000 can be made from 401(k)s or retirement accounts for the birth or adoption of a child.
  • 529 accounts can now be used to pay back qualified student loans with a lifetime limit of $10,000 per person.
  • Tax credits given to small businesses for establishing a retirement plan have been increased.
  • A new tax credit will be given to small businesses adopting auto-enrollment provisions into their retirement plans.
  • Liability protection is provided for employers offering annuities within an employer-sponsored retirement plan.

If you have questions or concerns about how the SECURE Act impacts you, please reach out to your financial advisor or contact us for assistance.

 

 

 

Merriman’s Guide to Reducing Your Tax Bill

Merriman’s Guide to Reducing Your Tax Bill


Do you wish you could have done more to lower your tax bill or increase your refund for 2017? The Tax Cuts and Jobs Act of 2017 will have a major impact on many families, so it’s especially important to re-evaluate your tax strategies this year.

Check out our latest eBook for things you can do now to save on your tax bill in 2018. Topics include:

     Highlights from tax reform

     Itemized deductions – what’s left?

     New strategies to consider

     Classic strategies that still work

Download a free copy today!

Merriman INSIGHT – Using Qualified Charitable Distributions to Maximize Charitable Gifts

On December 18, 2015, the president signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. One of the popular tax provisions in this bill was to permanently extend the ability for IRA owners to make qualified charitable distributions (QCD) from their IRA to a qualified charity of their choice. Prior to the PATH Act, this provision expired multiple times since its debut in 2006, only to be temporarily extended by Congress each time, often at the last minute or retroactively. This uncertainty made charitable planning more difficult, but now we finally have clarity!

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works

IRA owners who are 70½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to qualified charity. The IRA owner can exclude the amount of the QCD from his or her gross income (thereby reducing their adjusted gross income), but any donation made via a QCD is not eligible for a charitable deduction. From a tax perspective, an exclusion from income is preferable over a deduction from income — particularly for those who don’t meet the itemized deductions threshold in the first place.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You’re only eligible to make a QCD if you are 70½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and private non-operating foundations are not eligible to receive QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning the check issued from your IRA must be payable to the organization. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor (for example, Charitable Remainder Trusts or Charitable Lead Trusts would not qualify). The donor cannot receive any economic benefit as part of the gift.

If you are interested in making a donation directly from your IRA to a charity, please reach out to your advisor to get started and make 2016 a year of giving!

Social Security Update – Couples Planning Just Got Tougher

In a previous Merriman Insight article, we wrote about the “free spousal” strategy for married couples. Shortly after that article was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd.  The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date.

Many recent articles have been written about the new law changes, so we won’t reinvent the wheel here. Instead, we’d recommend this article for a detailed discussion of the changes. The main highlights are:

  • The new rules are not retroactive; anyone currently employing a “file and suspend” or “restricted application” strategy will continue to be grandfathered under the old rules, as well as those who “file and suspend” by April 30, 2016 or who plan to use a “restricted application” and are at least 62 by the end of 2015
  • Survivor benefits and claiming strategies are unaffected by the new rules
  • “File and suspend” claims initiated after April 30, 2016 will now suspend all benefits based on the claimant’s earnings record (including spousal, ex-spouses, and dependent benefits)
  • “File and suspend” claims initiated after April 30, 2016 will no longer allow the claimant to reinstate their benefits back to the original suspension date and receive a lump sum payment
  • “Restricted applications” for spousal-only benefits will no longer be available to those who are not at least 62 by the end of 2015

If you believe the new rules will impact your situation, we recommend contacting your financial advisor to review your options.