By Allen Ostrofe | Download PDF
We received a call from Tom & Siobhan from Walnut Creek, California. They asked how the “Setting Every Community Up for Retirement Enhancement (SECURE) Act”, signed on December 20, 2019, might impact their retirement/estate planning. Both are employees, 69 years old, and charitably inclined. Both did not want to start taking required minimum distributions from their retirement at age 70.5 years. Instead, they both wished to extend the distributions of their IRAs, after their deaths, to their grandchildren ages 10 and up, for the duration of their grandchildren’s lifetimes. This example is called a “Stretch IRA”. The new Tax Act has changed their plan!
1. Why a Tax Law Change?
The answer depends upon whom you ask. Our Congressmen and Senators state that 700,000 more Americans will have access to retirement plans (source: American Council of Life Insurers). Small businesses are being offered tax credits from $500 to $5000 to start a new plan. However, those of us who frustratingly watch our government’s “deficit spending” believe it helps offset the government’s tax revenue loss from too much deferring of our required minimum distributions (RMD’s). One Certified Financial Planner (CFP®)—those who are held to the highest “Fiduciary Standard”—states: “From an advisor standpoint, I’m more than happy to trade off the loss of the stretch IRA to postpone the RMD age a bit longer, and be able to contribute longer! 10-years of deferring taxable income (instead of over the beneficiary’s lifetime) is still financially favorable!”
2. How Will the Change for the Start of RMDs affect Tom and Siobhan?
Will the change from 70.5-Years (or April 1st of the following year) to age 72 improve Tom and Siobhan’s distribution plan? Since Tom and Siobhan have no plans to retire soon, and they do not own more than 5% of their company, this is a windfall. They gain up to two years tax-deferred compounding of their untouched retirement funds, and they can still contribute more! They still have the option at age 70.5 years to make tax-free contributions to qualified charities (501c[3]) of their choice from their IRA, up to $100,000 per year. This strategy avoids taxes completely, while benefitting cash-strapped non-profit organizations.
3. What Amendments Will Tom and Siobhan Need to Make to Their “Stretch IRA” Strategy Due to the New Tax Law?
Under the old law, designated beneficiaries of an inherited IRA, ROTH, 401k, or 403(b) had the ability to “stretch” the distributions over their life expectancy. The SECURE Act reduces the maximum distribution period from these accounts (any owner who died after December 31, 2019) to 10 years. There are no requirements that payments be taken every year, just that the account must be fully liquidated by the end of 10 years. There are exceptions to the 10-year rule for surviving spouses, disabled individuals, beneficiaries less than 10 years younger than the account owner, and minor children of the account owner. These individuals will still be allowed to take a life-expectancy payout. We suggest scheduling a meeting with both a Certified Financial Planner (CFP®) and an estate planning attorney to develop an alternative strategy to ensure “income for life” for individuals not exempted from this new law, like older grandchildren.
4. What Else Should I Be Reviewing Now?
The beneficiaries of your IRAs, ROTH IRAs, 401k’s, and 403b’s generally are controlled neither by your will nor your trust. Review with your CFP® to make sure that your current beneficiaries are accurate for every single retirement (or insurance) plan. Make certain that you have named “contingent beneficiaries”. Review to make certain you have named “real people” as beneficiaries or ask your advisor whether it is prudent to name a trust as beneficiary or contingent beneficiary. One downside of some trusts as beneficiary, is that the trust may be forced to liquidate over a 5-year, not 10- year period. Check that you have included “Per Stirpes” next to those beneficiaries where you wish their kids subsequentially included.
Tom and Siobhan have made necessary changes in the retirement and estate planning. How about you? And, if you know of someone who is over 70.5 years and still working, they might consider continuing to contribute to their IRA.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The content provided herein is based on our interpretation of the SECURE Act and is not intended to be legal advice or provide a tax opinion. This information is a summary only and not meant to represent all provisions within the SECURE Act. Please consult your financial advisor regarding your specific situation.
Allen Ostrofe, MBA, CFP®, is President Emeritus of Ostrofe Financial Consultants, Inc., with clients in 32 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.