On Friday December 20th, 2019 the SECURE ( Setting Every Community Up for Retirement) Act was signed by President Trump after passing the House and Senate. The SECURE Act contains many provisions that will help individuals save for retirement such as:
- Removed the age limit on eligibility to make contributions to traditional IRAs. Now anyone with earnings can continue to make contributions to their IRA.
- The age for Required Minimum Distributions (RMD’s) is now 72 versus 70.5.
- Smaller employers can now join together in Pooled Employer Plans making it more cost effective and efficient for small employers to offer retirement plans.
- Annuities (lifetime income option) are now permitted.
- Expand portability options.
- Allow certain part time workers to participate in 401(K) plans
While these and other benefits are some the positive points of the plan, there had to be a way to recoup some of the lost income. As feared previously, that primarily came in the elimination of the Stretch IRA. A popular wealth planning tool to pass on accumulated wealth to heirs (ie., grandchildren) was to name a grandchild or a Trust for the benefit of the grandchild, as beneficiary of one’s IRA upon death. Then the IRA could be “stretched” over the life of the grandchild providing both the opportunity for the assets to continue growing and to limit the income paid out over time. With few exceptions, the ability to stretch the income is eliminated. Spouses, minor children, persons not more than 10 years younger than the account owner, disabled or the chronically ill are the few exceptions.
Now, after Dec 31, 2019, the IRA will have to be distributed out over a period of no less than 10 years. This can not only place the beneficiary into a much higher tax bracket but hamper the potential growth of the assets.
As mentioned previously, Conduit Trusts are effectively eliminated while the Discretionary or Accumulation Trust losses some appeal.
Yet, there are still some planning techniques that can be employed to plan for the distribution of your wealth:
- Discretionary or Accumulation Trusts can still be employed to pass on income and wealth over time and encourage positive outcomes. (The Trust receives the RMDs and then distributes income and or principal per the wishes of the grantor)
- Charitable Trusts could be named as recipients of IRA’s and trust beneficiaries can receive income over their lifetimes while the principal can benefit the ultimate charities.
- Traditional IRA’s might be converted to a ROTH IRA which has no RMD requirements or tax on withdrawals (though current taxes are paid on conversions).
- Transition IRAs to life insurance during one’s life.
First State Trust can help you navigate your options and accomplish your goals. With some additional planning and adjusting, your heirs can continue to be the beneficiaries of your success. Please don’t hesitate to reach out to us to discover how we can be of assistance.
The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.