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.
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
Written by retired Merriman Advisor Phuc Dang
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.
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