The Impact of The SECURE Act on Your Individual Retirement Account

President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law on December 20, 2019. Effective as of January 1, 2020, the SECURE Act significantly changes the Required Minimum Distribution (RMD) requirements for inherited retirement accounts.

Prior to the passage of the SECURE Act, a beneficiary of an inherited individual retirement account (IRA) could receive distributions over his or her lifetime through an estate planning strategy known as “stretchout.” Stretchout allowed the annual RMDs a beneficiary would receive to be paid out incrementally over their own lifetime, extending the IRAs tax-deferred (or tax-free for a Roth IRA) status, allowing for additional tax deferred growth. Stretchout also limited a beneficiary’s taxation to their annual RMD, rather than paying all of the taxes associated with the IRA if it were taken as a lump sum payment.

The SECURE Act has eliminated the possibility for a beneficiary of an IRA to utilize stretchout. Under the SECURE Act, there are no RMDs for inherited IRAs, but beneficiaries must withdraw all of the funds and close the account after ten (10) years. This limitation does not apply to the surviving spouse, a minor child of the IRA owner (until the child reaches majority), disabled or chronically ill individuals, or to an individual who is not more than ten years younger than the participant.

If you have named your Revocable Living Trust as the primary or contingent beneficiary of your IRA, distribution of your IRA will still be distributed pursuant to the terms of your Trust. However, your Trustee will be required to completely withdraw all plan assets within ten (10) years of the date of death. No revisions to your Trust will be needed. You may want to schedule a consultation with your financial advisor to discuss whether converting your traditional IRA to a Roth IRA could ultimately reduce the taxes paid by you and your heirs.

If you have created an IRA Inheritance Trust or have specific distribution language in your Trust limiting a beneficiary to only receive annual RMDs previously available, the terms of your Trust may need to be amended. This would not be considered a “routine” amendment to your estate plan due to the potential complexity of a new tax law. An IRA Inheritance Trust is still an effective estate planning strategy for spendthrift heirs, however, some of the previous tax benefits have been lost due to the passage of the SECURE Act.

Clients with large IRA accounts valued at over one million dollars ($1,000,000.00) who are concerned about the tax burden caused by the shortened withdrawal window may want to consider naming a Charitable Remainder Trust as the beneficiary of all or a portion of their IRA. A Charitable Remainder Trust would allow your intended beneficiary to receive income distributions over their lifetime with the remaining funds passing to a charity or charities of your choice following their death. The beneficiary of the Charitable Remainder Trust would only be liable for taxes on the distributions received while the principal would continue to grow tax free. In order for the Trust to qualify as a Charitable Remainder Trust, the remainder passing to charity must be at least ten percent of the fair market value of the assets contributed to the Charitable Remainder Trust. To discuss this planning strategy further, please contact Anne Rosenthal at [email protected]

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