Are Your Beneficiaries SECURE?
The SECURE Act was passed by congress late in 2019. SECURE stands for “Setting Every Community Up for Retirement Enhancement”. And, there were a few items within the law that affect how we advise and plan tax efficiently for our clients.
First, the SECURE Act raised the age at which Required Minimum Distributions (RMDs) must be taken from IRAs and other qualified plans from 70.5 to 72. If you were in the unfortunate few that turned 70.5 in 2019, you are stuck in the old law and must continue to take RMDs for the remainder of your life (although RMDs were waived in 2020 as part of the CARES Act)…confused yet? For those who turned 70.5 in the year 2020, you do not need to take an RMD until the calendar year in which you turn 72. This is one of the details that we handle for you (as far as letting you know when you need to take the distribution and how much), and with the CARES Act waiver of RMDs in 2020, you have not heard us talk much about this change. However, it will affect some going forward into 2021 and beyond.
Next, the SECURE Act changed the way that Beneficiary IRAs, or “Stretch IRAs,” can be withdrawn. In the past, the owner of a Beneficiary IRA could stretch out the RMDs over their lifetime, preserving a significant amount of tax-deferral (especially for younger beneficiaries such as adult children who inherit a deceased parent’s IRA). Under the new law, beneficiaries of IRA owners who died after 1/1/2020 must withdraw the entire IRA balance within 10 years.
This is where our planning gets a little tricky…if your IRA beneficiary (either primary or contingent) is a trust, we want to make sure that the language in the trust is very clear about how much or when the beneficiary can withdraw from the newly inherited IRA. Some older trusts use language that deals with “life expectancy factors” and only allow for the required minimum distribution amount to be withdrawn annually. However, under the new law, there is not a specific RMD in any given year; the only stipulation is that the entire balance be withdrawn within 10 years. So, if taken literally (as trust documents often are), a beneficiary potentially may not be able to withdraw anything from an inherited IRA until year 10 and then the entire balance would need to be withdrawn and taxable as ordinary income in that year. This scenario could be messy and costly from a tax perspective. Therefore, we are advising many of you who have trusts as either the primary or contingent beneficiary of your IRAs to:
- Consult with your estate attorney
- Make sure the language in the trust is compliant with the new SECURE Act
This measure allows beneficiaries the flexibility to withdraw over the 10 year period in a potentially tax efficient manner.
There are some exceptions to the new Beneficiary IRA rules. Certain people can still stretch IRAs out longer…more of those details are in the article linked below. Exception examples include (but are not limited to) the following:
- Surviving spouses
- A beneficiary who is less than 10 years younger than the deceased
- A minor child of the plan participant
- A disabled person or
- A chronically ill person
The most common of these, in our world, is a surviving spouse. A surviving spouse maintains the ability to roll his/her deceased spouse’s IRA into his/her own IRA and follow general distribution guidelines (RMDs at age 72).
There are other ways of simplifying IRA beneficiaries in a post-SECURE Act world, including naming children or others individually as either primary or contingent beneficiaries and not a trust. However, some people like the advantages a trust provides (protection from creditors, etc.). So, naming individuals as beneficiaries is not for everyone either. Every client’s situation is unique and we are happy to discuss yours.
-Gary Weiss, January 2021
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