Author: Brenton McWilliams
Changes to Planning for Retirement Accounts Brought on By the SECURE Act
The SECURE Act
New federal legislation this year, the Setting Every Community Up for Retirement Enhancement or SECURE Act brought about several changes to retirement accounts including IRAs and 401(k)s. The changes include an increase in the age for the start of required minimum distributions, an increase in the age cap for contributions to a traditional IRA, and some tweaks to the distribution options for death beneficiaries.
Previous Rules – The Stretch
Under previous rules, most death beneficiaries had the option to take required minimum distributions from the inherited IRA in equal payments annually according to their life expectancy. This was commonly referred to as the “stretch.” Under the new rules, the stretch is removed as an option for many beneficiaries and replaced with a requirement to distribute the inherited amount within 10 years.
New Rules – 10-Year Withdrawal Rule
Under the new rules, the stretch is still available for the surviving spouse of the deceased account owner, a disabled or chronically ill individual (see the act for specific qualifications) and an individual not more than 10 years younger than the deceased account owner. Minor children of the deceased account holder also qualify for the stretch until they reach their state’s age of majority. When they reach the age of majority, the stretch turns into a 10-year rule.
Trust Planning for Retirement Accounts
A conduit trust was a popular estate planning technique under the previous rules. The conduit trust serves as an intermediary between the IRA and the death beneficiary. Under the terms of the conduit trust, the trustee is typically instructed to take the out the lowest minimum required distribution from the IRA each year and pay it directly to the beneficiaries of the trust. The goal was to ensure a stream of income for the lifetime of the beneficiaries and to slow down the beneficiaries’ receipt of the inheritance. Under these trusts, the withdrawals from the retirement account in the IRA are typical timed according to the rules for required minimum distribution, and the distributions from the trust to the beneficiary are made in the same year as the withdrawal from the retirement account.
Individuals who currently have trust planning in place for their IRA or 401(k) should review the terms of the trust to see if the new rules frustrate their planning goals or if the terms of the trust are no longer compatible with the rules. The new rules may turn what was supposed to be a lifetime stream of income into a 10-year payout.
An accumulation trust is another option for those who want to stretch out trust payments beyond the 10-year distribution requirement. Using an accumulation trust, the trustee will take withdrawals from the inherited retirement account as slowly as possible according to the trust distribution schedule. If the 10-year distribution requirement applies, instead of distributing the withdrawals from the retirement account out in the same year the withdrawals are taken, the trustee holds a certain amount of assets in trust to stretch the trust distributions out longer. The downside being that the income generated from the assets held by the trust will be subject to the income tax brackets for trusts which will likely result in higher taxes than if the beneficiary held the assets.
If you currently have trust planning in place for your IRA or 401(k) and you would like to discuss the impacts from the SECURE act, or if you are interested in talking about trust planning for your IRA or 401(k), please call me at (251) 215-9275 or write me on the contact page to discuss how I can help.