The SECURE Act and Retirement Beneficiary Designations

July 13, 2020

secure act 2020
A new revenue-generating federal law effective in January 2020 accelerates when your future beneficiaries must pay income tax on inherited retirement account distributions. The Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminates the long-favored “stretch IRA” which allowed the Designated Beneficiary to take payments (and pay the income tax thereon) over his or her life expectancy.

The SECURE Act now reduces the period for retirement account Beneficiary distributions to only 10 years, with a few exceptions. Remember that retirement accounts (IRAs, 401k and 403b plans) are “tax-deferred”. This means that the income tax will be paid either by you when you take withdrawals in retirement OR by the Beneficiaries who receive any remaining funds after your death.

important info about the secure act 2020Here are some considerations in deciding how to complete your Trust and IRA Beneficiary Designations:

  1. The best option is usually a surviving spouse who can ‘rollover’ into his or her own IRA, for maximum flexibility.
  2. If you intend to include in your overall estate plan any of the following, you may want to name them as eligible designated beneficiaries (“EDB”) of your IRA under the SECURE Act:
    • Minor children of the account holder (in a trust), although the 10-year payout begins at the age of majority- and possibly later if enrolled as a full-time student
    • Someone with a long-term disability or chronic illness, including a Special Needs Trust for the individual.
    • A person who is not more than 10 years younger than you, such as a sibling.
    • A tax-exempt charitable organization, which includes a Charitable Remainder Trust to give you lifetime income, plus an immediate charitable deduction.
  3. Since most adult children do not fall into the above categories. they will pay the income tax within 10 years. They can choose to receive the benefits (and pay the tax) in annual installments, or defer all to a single tax year– perhaps with a plan for generating offsetting losses.
  4. Many estate plans designate your Trust as a potential IRA Beneficiary. The SECURE Act eliminates the long-term protection of Trustee oversight against creditor claims, or immature spending, beyond the initial 10 year term. A Trust also may pay tax at the higher trust income rates for IRA distributions retained in the Trust. For more information click here.

A final thought is to consider a Roth IRA conversion if your Beneficiaries are in a higher income tax bracket than yours- such as if your children are in their prime earning years. This will require immediate cash to pay the tax due on the conversion, but may save more tax overall for your children to receive the IRAs with the tax already paid (by you).

Coordinating your estate plan Beneficiaries is even more important with the SECURE Act. Now more than ever, the Beneficiaries under your Trust, Will and retirement accounts may need fine-tuning. Please contact us if it’s time for a review.

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