On December 20, 2019, the President signed into law the “Setting Every Community Up for Retirement Enhancement” bill, known as the SECURE Act. Most of the provisions went into effect January 1, 2020.
The SECURE Act brought the most significant changes to retirement plans since the Pension Protection Act of 2006. For many people, qualified retirement plans are the largest asset in their estate. In addition to plans such as 401(k) and 403(b) accounts, an estimated 49 million people have IRAs. Unfortunately, many of the retirement plans are inadequately funded. As a result, longer life expectancies are putting millions of people at financial risk in their later years.
The SECURE Act enhances the attractiveness of both employer-sponsored and individual retirement plans. By extending the period to contribute to qualified retirement plans and delaying required distributions from such plans is, individuals are able to set aside more assets for retirement. The SECURE Act provides greater access by making it easier and cheaper for small businesses to offer retirement plans to their employees. More part-time and contract workers will be able to participate in employer-sponsored plans. Account holders may also use retirement assets to address certain financial obligations that come with the birth or adoption of a child as well as paying qualified student loans.
Three Key Changes to IRAs and Other Retirement Plans
1. An increase in the age to take required minimum distributions. The age required to take required minimum distributions (RMD) has been increased from 70 ½ to 72. This will give people extra time to build up their retirement plans. The SECURE Act, however, leaves in place the ability to make charitable distributions from IRAs through a Qualified Charitable Distribution (QCD) beginning at age 70 ½. The distributions avoid tax, and once a person reaches 72, QCDs apply to the RMD for a particular year. (See this recently posted article on Qualified Charitable Distributions).
2. No longer age limits on contributing to an IRA. Individuals can continue to contribute to IRAs beyond age 70 ½ as long as they have earned income.
3. The death of the Stretch IRA. Before the SECURE Act, an IRA beneficiary could take distributions over their life expectancy. This option was commonly referred to as a Stretch IRA. In many cases, the payout from an inherited IRA could extend over 30 or 40 years. Now, inherited IRAs, with a few exceptions, must be depleted within ten years. Exceptions are a surviving spouse, a minor child, or a beneficiary who is disabled or not more than ten years younger than the account owner.
Death of the Stretch IRA
The requirement to distribute all assets from an IRA within ten years will dramatically impact many estate plans. No longer can a child be named as beneficiary and receive income over their lifetime. The ten-year rule will mean that beneficiaries will face accelerated taxation on IRA assets and an end of a life-income stream.
A Charitable Alternative to the Stretch IRA
Instead of naming a child as beneficiary of an IRA, a person can direct IRA assets to a Testamentary Charitable Remainder Unitrust (CRT), a tax-advantaged trust that is set up during life and funded at death. The CRT will preserve tax-fee growth of assets and pay an annual income to the child throughout their life or for a term of years. The payout is a percentage of the assets in the trust, revalued each year. The CRT provides a steady stream of income and allows for income to grow as the trust principal grows.
One thing remains clear from the SECURE Act. The ability to use retirement assets to make charitable gifts remains very attractive, both during lifetime and at death.
We invite you to contact us to learn more about Testamentary Charitable Remainder Trusts and other ways in which you can use your retirement funds to support family and charity.
This information is not intended as tax, legal or financial advice. Consult your financial advisor for information specific to your situation.
About the Author
Since 2000, Randy has served as Director of Planned Giving for Southwestern Medical Foundation and UT Southwestern Medical Center. He works with donors to suggest bequest language to share with attorneys, establish charitable gift annuities and charitable remainder trusts, utilize beneficiary designations for retirement plan accounts and explore gifts of other non-cash assets like real estate and life insurance. After receiving a Masters of Divinity degree from Vanderbilt University, Randy began a career in development, working in higher education, the arts and in academic medicine. He received the Chartered Advisor in Philanthropy designation (CAP) through the American College of Financial Services.
To contact Randy Daugherty, please call (214) 648-3069 or email him at randal.daugherty@utsouthwestern.edu.