Retirement Planning Changes Ahead

In late December, Congress passed and the President signed the SECURE Act (Setting Every Community Up for Retirement Enhancement).  The new law presents opportunities and also potential pitfalls for existing estate plans.  Among the changes:

  • For those turning 70½ after 2019, required minimum distributions can be postponed until age 72, allowing continued tax-deferred growth in IRAs and 401(k) plans.
  • Those with earned income can continue contributing to deductible IRAs until age 72.  The previous cut-off was age 70
  • Employers offering 401(k) plans will be required to allow certain part-time employees to participate.
  • Incentives are offered to encourage smaller employers to offer retirement plans through pooled employer plans.
  • Stretch-out IRAs will no longer be available, except for surviving spouses and beneficiaries who are disabled, “chronically ill” or not more than 10 years younger than the IRA owner.  Minor children are also an exception, although once the child reaches the age of majority, remaining benefits must be taken within 10 years.

Previously, if an IRA owner named a grandchild as beneficiary, IRA distributions could span several decades.  For example, a 9-year-old has a 73.8-year life expectancy, according to IRA tables.  If the grandchild was named the beneficiary of a $500,000 IRA, the first required minimum distribution would be $6,775 ($500,000 ÷ 73.8).  The child was required to take annual distributions, but the IRA could continue tax-deferred growth.  Under the SECURE Act, the child must withdraw the entire balance of the IRA within 10 years of reaching the age of majority.

  • Most non-spouse IRA beneficiaries who are not “designated beneficiaries” must withdraw the entire balance of the IRA within 10 years.  Previously, there was a five-year withdrawal period.
  • Kiddie-tax rates are changed.  Prior to 2018, children under age 19 and most full-time students under age 24 were taxed at their parents’ highest tax rate on unearned income (capital gains, dividends, interest) in excess of a certain amount ($2,200 in 2019 and 2020).  The Tax Cuts and Jobs Act of 2017 changed the rate, in an effort to make it easier to calculate the tax.  In 2018 and 2019, children with unearned income were taxed at the rates in effect for trusts and estates.  The top 37% rate applied when income exceeded $12,750 in 2019.  However, some low- and middle-income children were being taxed on certain income, such as survivor benefits for Gold Star families, that was never intended to be taxed at the top rates.  Under the SECURE Act, the unearned income will again be taxed at the parents’ highest tax rates.  This change applies to tax years beginning in 2020, but taxpayers may elect to file amended returns for 2018 and 2019.
  • Qualified charitable distributions (QCDs) from IRAs may continue to be made after age 70½, even though IRA owners might not have to take required minimum distributions until age 72.  If the donor continues working and contributes to a deductible IRA, the maximum amount of the QCD ($100,000 annually) is reduced by the amount of the deduction claimed for the IRA contribution.

Changes brought about by the SECURE Act should prompt a review of IRA beneficiary designations, particularly if plans included stretch-out distributions of IRAs.  With a few exceptions, IRAs now will have to be emptied within 10 years of the owner’s death.  There are two ways to provide lifetime payments and also a generous charitable gift through an IRA.  Depending on the age or ages of the beneficiaries, it may be possible to use part or all of an IRA to fund a charitable remainder trust or charitable gift annuity.  There would be no immediate income tax when the trust or gift annuity is funded, and payments can be made for life or a term of up to 20 years (charitable remainder trust) or over the life of the beneficiary (gift annuity).  If the beneficiary is younger than charity’s minimum gift annuity age, a deferred payment annuity that makes larger payments beginning at some future date, may be an option.