Late last year, Congress overwhelmingly approved the SECURE Act, the second major overhaul to tax legislation to occur in the Trump presidency. While not as massive or robust as the Tax Cuts and Jobs Act (TCJA), the SECURE act has made some substantial changes, particularly to IRA Required Minimum Distributions. There appear to be some clear winners and losers – so which category do you fall into (hint – it’s probably both!)?
For initial contributors to IRA accounts (Generation One), the rules have loosened a bit. You can now contribute to an IRA account past the age of 70 (assuming you have income from employment), which might be particularly useful for Roth IRAs if your income isn’t as high as your earlier working days.
Also, Required Minimum Distributions have been pushed out from the calendar year when you turn 70.5 to the calendar year when you turn age 72, up to two years later. This can offer some years of lower overall taxable income and the ability to do some income- and tax-manipulation. However, this logically will likely make your RMDs higher once you turn age 72 as there will be less forecasted years over which to spread out your required distributions.
You can still utilize IRAs to make Qualified Charitable Distributions (QCDs) at age 70.5, even though your RMDs won’t start for another year or two. This continues to be a powerful tax planning tool to allow you to make tax-free withdrawals from your IRA via charitable gifts while possibly still qualifying for the higher standard deduction that was part of the TCJA of 2017.
Okay, this is where it starts to get problematic. The biggest change of the SECURE Act is the requirement for non-spousal beneficiaries to distribute all IRA assets (Traditional and Roth) within 10 years . On the upside, it doesn’t have to be evenly spread out over 10 years, so if you’re on the verge of retirement you may want to wait until you retire to take any distributions.
But the major downside is the inability to turn an Inherited IRA into a “Stretch IRA”, stretching the distributions of the inherited account out over the course of your lifetime. If you hadn’t made any distributions in the earlier years, this could lead to incurring large amounts of income tax at the end of the 10-year period. Note that this is for non-spousal beneficiaries only, so if you inherit an IRA from your spouse, you can still treat this as your own IRA for the remainder of your life.
This leads to some strategic planning opportunities for both Generations. For Generation One, this means trying to pass down less of your estate through IRA assets. This could likely lead to more incentive to use your IRA for charitable giving, both during your lifetime and through your estate. QCDs are a great way to “double-dip” on tax breaks as mentioned above, and will reduce the amount of tax that your heirs might owe from your estate.
Another way to pass down less taxable assets to your heirs is to do some strategic Roth conversions in years of lower taxable income. If your heirs might have to distribute IRA assets during their working years, then accelerating the tax into your retirement years might be an overall tax savings. My advice is to maximize the 12% federal income tax bracket at a minimum, and possibly higher tax brackets depending on the overall projected size of your estate. This is most likely to occur during your retirement years, but there may be other random years it makes sense such as during a job change, etc.
You may also want to consider starting to take normal IRA distributions before age 72, even though you don’t have to, for similar reasons.
Also, if you have desires to make a charitable bequest from your estate, this is best done through IRA beneficiary designations. Any amounts given to qualified 501(c)3 organizations escape taxes altogether since they are non-taxable entities. This changes money contributed to an IRA from being tax-deferred to tax-free!
For Generation Two, your best bet is simply to try to plan on distributing the account over your lowest-tax years. If retirement or other income changes are on the horizon, this might mean either deferring or accelerating the distributions. If your income should stay relatively the same over the next decade, then you’re likely better off just taking even distributions over the 10-year window.
Overwhelmed yet? Believe it or not, there are numerous other provisions of the Act, relating to employer-sponsored retirement plans, miscellaneous tax credits and deductions. But the above items are the ones most likely to affect you, and you should start planning today to avoid a potentially costly tax bill later.
We’re happy to help you analyze your situation and sort through how the SECURE Act will affect you specifically. Just contact us and give us an overview of your situation, questions and how we can help you navigate these complicated waters!
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