Celebrating my amazing wife Carrie’s birthday last month, I frankly outperformed. I took her to the Homestead Hot Springs resort in nowheresville Virginia to see it decorated for the holidays. I highly recommend the resort but go in the warmer months to enjoy all their outside amenities.
I then spirited her to an excellent winery near her hometown of Harrisonburg Virginia, we then visited a favorite Irish watering hole in the Shenandoah Valley and then trekked back across the Mason Dixon line to see a Talking Heads cover band in Harrisburg. What do they say, you’re as good once as you ever were? We proved it!
Carrie really appreciated the weekend. The high (low) light of the excursion for me occurred having while having breakfast at the Homestead. A gentlemen waiter was professionally attending to his dining guests and not displaying much emotion - until he saw me, that is. He bounded over to our table with a wide grin, grabbed my shoulder and beamed “did you get a donut?!” He immediately went back to his stoic posture serving other guests.
The message he was indubitably sending is that I must love donuts given my physique. I took his conviviality as a strong signal that 2020 is the year to finally get in better physical shape. Many folks who have serious weight have a good shaming story that prompted them to make changes; my donut story would make for a fine one…
I’m sure you noticed that our blog posting went from regular to intermittent to MIA over the course of 2019. We got so busy in the fourth quarter that something had to yield and blog writing always takes a back seat to client service.
Now that Shae Hess is on staff and adding value, we’re back to regular blog posting for 2020 as yet another new year’s resolution. Let me the start the new decade with a doozy, the new SECURE Act that passed late last month.
After several suspenseful months awaiting its approval, the SECURE Act was finally made law in December, tacked onto the latest federal spending package and became effective January 1st, 2020.
The SECURE Act enacted a sweeping set of changes to retirement investment accounts and will become a major estate planning headache for many retirees.
Before I get to the source of my anxiety over the new law, there are some minor goodies in the law to acknowledge:
- The age at which you must start your required minimum distributions from IRAs and retirement plans was increased from age 70.5 to age 72;
- If you have earned income past age 70.5, you can now contribute to an IRA;
- Up to $10,000 (lifetime maximum) of 529 education savings accounts can be used to pay student loans;
- Penalty-free early withdrawals of up to $5,000 from an IRA allowed related to the birth or adoption of a child.
There were several other changes made to employer retirement plans, but they are beyond the scope of today’s blog.
The key change demanding your attention is the elimination of the “Stretch IRA”. Prior to 2020, this useful tax rule allowed non-spouse beneficiaries who inherit an IRA to spread the required distributions over their remaining lifetime, making it easier to manage the tax liability associated with taxable IRA distributions.
For example, under the old law, a thirty-year old child who inherited an IRA from a parent could choose to stretch out the minimum require distributions over a sixty-year expected lifetime.
As financial planners, we really liked the Stretch IRA and will miss it dearly.
Under the new law, any non-spouse beneficiary who is more than ten years younger than the account owner, including a trust, must fully liquidate the account within ten years of the account owner's death and pay tax on all of it. Ouch!
Note that a spouse can inherit an IRA from their deceased spouse and be exempt from the new ten-year IRA empty rule, as well as a disabled and/or chronically ill heir and a minor child (but only until the minor reaches the age of majority) - but not grandchildren.
Under the ten-year rule, there are no RMD distributions required during the ten-year period. Instead, the entire IRA balance must be emptied by the end of ten years at the heir’s discretion as to timing of the distribution.
This compressed IRA distribution period could result in a material unwanted income tax bill for IRA account beneficiaries, disinheritance issues and a sizable tax revenue windfall for the US Treasury (which was the intent).
Inherited Roth IRAs are subject to the same ten-year payout rule, except distributions are tax-free. The government’s intent is to eliminate the “dynasty” Roth IRA wherein the account growth is never taxed across generations.
The only scintilla of favorable news regarding this profound tax law change is that IRAs and Roth IRAs inherited before 2020 are grandfathered, but only until the current account beneficiary passes away.
For folks who have meaningful qualified retirement plan assets, it is time to revisit your financial plan to seek to mitigate the damage from the lost Stretch IRA benefit.
While the financial planning options to offset are limited, there are some techniques to consider. One is to name charities as your IRA beneficiary and use cash value life insurance to replace the inheritance asset for your heirs.
Another planning tool could be a Roth IRA conversion to freeze and/or reduce the value of IRA assets now. The trade-off is the conversion would generate a current year tax bill, albeit possibly a smaller one than a future inherited IRA might under the new law.
Lastly, naming a charitable remainder trust as IRA beneficiary could afford a longer stretch of your IRA distributions and reduce the tax impact.
Check with your tax pro before making any moves with your retirement assets.
And don’t shoot the messenger, but rather call us if you want to discuss the impact of the SECURE Act on your personal estate plan.
Until next time, be well…….Tim