San Diego Union-Tribune (Sunday)
Feeling SECURE?
New act brings questions about beneficiaries
Many readers have written me with questions about the SECURE Act, the new federal law enacted in December that significantly changed the rules governing retirement accounts. In this column, I’ll review some of the important issues and discuss some alternative strategies that may mitigate the impact of the law.
First, I want to reiterate that the act does not affect beneficiaries who inherited IRAS on or prior to Dec. 31, 2019.
One of the major changes associated with the SECURE Act is the 10-year limit for many beneficiaries, such as adult children. Such a beneficiary must withdraw the entire IRA balance by the 10th year after the IRA owner’s death. The beneficiary is not subject to required minimum distributions for the first nine years after the inheritance, but he/she must withdraw the entire remaining balance by the end of the 10th year.
If the IRA was a traditional IRA, then all withdrawals will be taxable at ordinary income tax rates of the beneficiary. Thus, gradual withdrawals may make more sense in order to avoid a large income tax in the 10th year because the marginal tax rate may be much higher.
If the account was a Roth IRA, then the withdrawals (whether of principal or gains) are not taxable. So, in the case of a Roth account, there is no downside in waiting until the 10th year for a large withdrawal.
According to IRA expert Ed Slott, there are five classes of designated beneficiaries that are still eligible for a stretch IRA (known as eligible designated beneficiaries, or EDBS):
■ Surviving spouses
■ Minor children, up to majority (but not grandchildren)
■ Disabled individuals, as defined by IRS rules
■ Chronically ill people
■ Individuals not more than 10 years younger than the IRA owner (generally siblings)
If a minor inherits an IRA, he/she would begin the stretch payment based on the 70-year payout amount each year using the old laws. Once the minor reaches the majority age (which varies by state), the 10-year rule will then apply.
All successor beneficiaries after December 31, 2019, are subject to the 10year rule. This is the case even if the original beneficiary is an EDB.
Slott points out that under the old rules, many set up conduit trusts or discretionary trusts to maintain postdeath control while minimizing taxes for beneficiaries. However, under the new rules, those advantages no longer apply.
The bottom line is most trusts will need changes because of the Secure Act, and IRA owners who had used IRA trusts should review their estate plan with their attorneys.
As I indicated in a prior column, there are other options an IRA owner can consider. One is to increase the amount left to the surviving spouse and suggest that the spouse name the same beneficiaries. Another option is to plan to make additional Roth conversions, so that beneficiaries will not face large income tax liabilities.
A third option is the use of life insurance, which can be left to a trust. Life insurance is a much more flexible asset. There are no RMDS or complex tax rules, and the proceeds will be tax-free.
Some of these options can be complex. They should be considered only after consultation with a qualified attorney and/or financial adviser.