The “Setting Every Community Up for Retirement Enhancement Act” of 2019, better known as the SECURE Act, was approved by the Senate on Dec. 19, 2019, as part of an end-of-year appropriations act and accompanying tax measure, and signed into law on Dec. 20 by President Donald Trump. The far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
The SECURE Act was part of a larger law that passed with bipartisan support in late December 2019 and went to effect January 1, 2020. The Secure Act requires more rapid distributions of retirement benefits to most beneficiaries, a 10-year rule for all except “eligible designated beneficiaries.” So, assuming your beneficiary would be subject to the 10-year rule, what can you do to get the best stretch?
There are no perfect solutions. However, there are some things you can do which will allow you to make the most of the stretch allowed under the SECURE Act. The first is a simple strategy, to “Roth” the retirement assets while you’re alive. When you convert your IRA to a Roth IRA, you pay income tax on the assets upon conversion. After that, you never have to take distributions during your lifetime. When you or your beneficiaries take distributions, they’ll be free of income tax, including any growth on the assets. This is because you’ve already paid the income tax due to the Roth conversion.
Your beneficiaries will still be subject to the 10-year, but they could wait until the end of the 10-year period and take the entire balance out at that time. This would allow the assets to grow free from income tax for the longest possible period. Without a Roth conversion, the beneficiaries would likely need to take them over several years to minimize the impact of taking the retirement assets into income and driving the beneficiary into a higher marginal income tax bracket. The Roth strategy avoids that because the withdrawal of the assets doesn’t impact the beneficiary’s taxable income because a Roth IRA is tax-free upon distribution.
The second and more complex strategy is having a Charitable Remainder Trust (“CRT”) as the beneficiary of the IRA or retirement plan. A CRT itself is a tax-exempt entity but distributions to the non-charitable beneficiary carry out the income tax characteristics of income earned by the CRT. The IRA would payout to the CRT within 5 years of the Participant’s death, bringing taxable income to the CRT. But, as a tax-exempt entity, the CRT itself would pay no income tax on the distributions from the IRA.
The SECURE Act is now part of the law. You can accept its 10-year limitation on deferral, or you can plan to maximize the deferral within the limitations of the Secure Act. The simplest way to maximize the deferral within the SECURE Act’s 10-year limitation is a Roth conversion. A more complicated, but potentially more powerful solution is to name a CRT as the beneficiary and deferring income taxation based on the nature of the CRT. A qualified estate planning attorney can help you choose the solution that’s right for you.
Here at Tacoma Elder Care, estate planning attorney, Bob Michaels can walk you through this and help you understand if the SECURE Act could benefit you.
Schedule a FREE consultation today HERE.