Elderly Couple

by Kristin Carter, CPA – Vice President & Tax Officer

In late December 2019, the “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was signed into law. The SECURE Act was intended to expand opportunities for taxpayers to save for retirement and to simplify administration for retirement accounts, among various other changes. The passage of the SECURE Act has resulted in unique challenges and planning opportunities in the estate planning arena, generally effective January 1, 2020, as discussed below.

Repeal of Maximum Age for Traditional IRA Contributions

Under pre-SECURE Act law, only those individuals who remained under age 70½ at year-end were allowed to make contributions to traditional IRAs. This restriction did not apply to Roth IRA or retirement plan contributions.

Under the new SECURE Act rules, the maximum age for making contributions to a traditional IRA has been repealed. Having earned income remains a requirement for contributing to a traditional IRA, however.

Additionally, for those who have reached age 70½, careful consideration should be given to coordinating IRA contributions with qualified charitable distributions (QCDs) made to charity as well as required minimum distributions (RMDs). Your Central Trust Company team can assist you in analyzing and planning for these changes.

Increase in the Beginning Age for RMDs

Under the SECURE Act, the age at which required minimum distributions must begin has increased from age 70½ to age 72.

The IRS has also proposed changes to the life expectancy tables upon which RMDs are calculated in order to reflect that taxpayers are living longer, allowing RMD funds to be spread over a longer lifetime. While the proposed changes must still be formally approved, the new life expectancy tables could possibly take effect for tax year 2021’s RMD calculations.

A unique planning opportunity exists for those taxpayers who have reached age 70½ and are charitably inclined. The age at which qualified charitable distributions (QCDs) can be made to charity directly out of an IRA has remained at 70½, while the RMD beginning age has increased to age 72. If you do not want or need your IRA funds, and plan to donate funds to charity, you may still donate directly from your IRA beginning at age 70½ – to the tune of up to $100,000 per year, per taxpayer. This planning strategy allows individuals to draw down their IRA balance before reaching the RMD beginning age, and essentially reducing the amount of RMD funds that must be withdrawn each year.

RMD Payout Rules Modified & Elimination of the “Stretch IRA”

While an IRA owner or retirement plan participant is alive (and upon the account owner reaching the beginning age for required minimum distributions), RMDs must be made based on the life expectancy of the account owner, or over the joint life expectancy of the account owner and a designated beneficiary.

The “stretch IRA” – a popular estate planning tool in the pre-SECURE Act era – allowed an IRA owner (or retirement plan participant) to stretch the RMDs over the life of the beneficiary after the IRA owner’s death, if the decedent had not yet begun taking RMDs. This strategy allowed for IRA funds to be spread over many years, thus minimizing the tax impact of taxable IRA distributions on beneficiaries.

Under the new SECURE Act rules, most beneficiaries will be required to take the entire IRA or retirement plan account balance within a 10-year window, thus eliminating the “stretch” provisions for most beneficiaries, and ultimately forcing IRA distributions to be taxed within in a shorter 10-year window. This rule applies regardless of whether the account owner had reached the beginning RMD age. Some exceptions remain for surviving spouses, minor children, chronically ill or disabled beneficiaries, or beneficiaries who are not more than 10 years younger than the account owner.

The silver lining is that there is no RMD “calculation” or set amount to take as an RMD each year, allowing for flexibility in the amounts and timing of distributions, so long as the entire IRA account balance is emptied by the end of the 10th year following the IRA owner’s death.

IRA owners should revisit their estate plan to review beneficiary designations and ensure that the SECURE Act will not result in unintended consequences upon the death of the grantor. This is especially important if a trust has been named as beneficiary of the IRA as the “look through” rules for trusts have been severely limited.

Additionally, it may make sense to consider a full or partial conversion to a Roth IRA. While Roth IRAs will endure the same 10-year payout scheme as traditional IRAs, qualified Roth IRAs would allow distributions to flow tax-free to beneficiaries after the death of the IRA owner.

Other Miscellaneous Changes under the SECURE Act

A variety of other changes were included in the SECURE Act that may be of interest to you. Several of the key provisions are highlighted below:

  • Long-term, part-time workers can now participate in 401(k) plans. Previously, part-time workers could be excluded from participation in employer plans.
  • Withdrawals from retirement plans and IRAs for births or adoptions can now be made penalty-free. The distributions would still be considered taxable income if the funds were pre-tax, but the 10% early withdrawal penalty would be waived.
  • Relief for multiple employer plans was enacted, allowing two or more unrelated employers to join together in a single employer retirement plan. This change allows smaller businesses to share costs and efficiencies with other employers, resulting in better retirement benefits being offered to employees.
  • Expansion of 529 plans to cover costs associated with registered apprenticeships and repayment of up to $10,000 of qualified student loan debt.
  • “Kiddie tax” rule changes made under the Tax Cuts & Jobs Act have been repealed, resulting in unearned income of children to be taxed at their parents’ highest marginal tax rate, rather than being taxed at trust/estate rates.

Your Central Trust team stands ready to assist you and your team of advisors in planning for the changes made under the SECURE Act. Please reach out with any questions or to schedule a time to discuss how these changes may affect you.