Law News and Tips
Fred Vilbig ©2020
On December 20th, President Trump as part of the 2020 Appropriations Act signed the SECURE Act which changed some of the tax rules governing IRAs.I love the way Congress bundles all of these things into a single bill at the end of the year to make us think they are actually being productive. But that’s another column.
In order to understand the changes, it may be helpful to review how IRAs work generally. During employment and prior to reaching 70 ½, the Tax Code allowed us to exclude from income certain amounts that are deposited in individual retirement accounts (“IRAs”) and other qualified plans. As long as the funds are in one of these qualified plans, they grow tax-deferred. Upon reaching 70 ½ the employee is required to withdraw what is called “required minimum distributions” (“RMDs”) which are amounts calculated to entirely distribute the account assets over the expected life of the employee-beneficiary. These RMDs are generally taxable as ordinary income. If the employee-beneficiary died before the complete distribution of the account, a surviving spouse could roll-over the account to a new IRA on a tax-free basis. If there was no surviving spouse, then the designated non-spouse beneficiaries would “inherit” the IRA, and they were allowed to withdraw RMDs over their life expectancies. But if the employee-beneficiary failed to name a beneficiary at all, then the IRA assets are distributable to the decedent’s estate and have to be taken out within 5 years of his or her death. That’s it in a nutshell.
First, let me assure everyone that IRAs and other qualified plans are still excellent vehicles to save for retirement. Income earned during years when you are subject to higher income tax rates grows tax-deferred and is received and taxed during years with lower income tax rates. But the SECURE Act did change some things. You’ll want to talk to your financial planner or your company plan administrator to see how these changes affect you, but here is a very short summary.
Employees can now make retirement plan contributions after age 70 ½. The required beginning date for RMDs is increased from 70 ½ to 72 years of age. And IRA distributions can be taken without penalty for births and adoptions.
All of these changes are supposed to be revenue-neutral, so the way Congress chose to raise revenues to pay for these changes is to require inherited IRAs to be paid out over 10 years instead of the life expectancy of the designated beneficiary.
It is this last change that has the most impact on estate planning. In 1999, the IRS gave us language to allow us to flow IRA distributions through trusts, and all of our trusts include that language. Flowing the distributions through trust is important because inherited IRAs are not protected from creditors, and using a trust can give some asset protection. It used to be for life, but now it will only be for 10 years. I don’t know what we can do to plan around that from an estate planning perspective. It is what it is.
In any event, if you have any questions regarding what these changes (and there are other ones in the law that I am not discussing), please contact your financial advisor or your company plan administrator.I’m sure you’re going to be hearing a lot about these things. But continue to save for retirement.