Changes to Your Retirement Planning from the SECURE Act

January 30, 2020

A brief memo for clients and friends of the Seward & Kissel Trusts & Estates group.

Summary of Key Points

  • The recently enacted federal SECURE Act changed the rules regarding IRA and similar retirements accounts, both during the life of the owner and after his or her death.
  • The age upon which IRA account owners must begin taking Required Minimum Distributions has increased from 70½ to 72, for anyone who hasn’t reached age 70½ prior to January 1, 2020.
  • For beneficiaries other than surviving spouses, IRAs that are inherited after 2019 can no longer be distributed over the course of the inheriting beneficiary’s life, and now in most cases must be paid out within 10 years of the original owner’s death.
  • The rules for surviving spouses have not materially changed.

Read below to learn more about planning with retirement assets under these new rules.

What are the New Rules for Inherited IRAs?

Under prior law, required distributions from an inherited IRA could be distributed over the course of the beneficiary’s expected lifespan, potentially allowing for a long period of tax-free growth. Under the SECURE Act, except in limited circumstances, IRAs that are inherited on or after January 1, 2020 must be distributed within 10 years of the owner’s death. As a result, most IRA beneficiaries other than surviving spouses will experience a shorter period of tax-free growth and potentially higher taxes when distributions are taken due to higher marginal rates. IRAs passing to a surviving spouse are not impacted by the new rules.

Who Will Want to Update Their Estate Plans?

Anyone with a large IRA or similar retirement account (like a 401(k)) should review their estate plan to see if changes should be made. If the IRA is payable to a “conduit” trust that is intended to only make distributions to a beneficiary over the beneficiary’s life expectancy, it will in most circumstances no longer function as intended and should be changed. Other types of trust arrangements (known as “accumulation” trusts) will continue to permit withholding of distributions to beneficiaries for as long as desired, but the IRA must now terminate and pay its funds to the trust within either 5 or 10 years.

What Options Are Available to IRA Owners Who Want to Delay Payment to Beneficiaries?

  • No change is required if a surviving spouse is the beneficiary of the IRA – the SECURE Act did not change the rules for surviving spouses.
  • If the designated beneficiary of an IRA is a minor child, the owner should decide whether to name the child directly, in which case the IRA must be distributed within 10 years of the minor reaching the age of majority (18 in most states), or to name an accumulation trust for the child’s benefit as a beneficiary of the IRA, in which case the IRA will terminate within 10 years of the owner’s death, but the trust will hold the IRA funds and will make distributions to the beneficiary only as designated in the trust instrument.
  • If the designated beneficiary of an IRA is disabled, the IRA can be made payable to a “conduit” trust that would continue to permit distributions over the beneficiary’s life expectancy.
  • If the owner intends for a portion of the IRA to go to charity and a portion to pass to non-charitable beneficiaries, the owner can designate a charitable remainder trust (“CRT”) as the beneficiary of the IRA. A CRT would permit further tax-free growth while requiring regular payments to the non-charitable beneficiary of a fixed percentage of the trust value over the beneficiary’s life expectancy, with the remainder at the beneficiary’s death passing to charity.
  • If the owner is planning to distribute assets at death to siblings or others who are less than 10 years younger than the owner, the owner may want to consider using the IRA for this purpose, since a beneficiary who is less than 10 years younger than the IRA owner can continue to receive distributions over the beneficiary’s life expectancy.

Would Converting to a Roth IRA Save Taxes?

An inherited Roth IRA can be a wonderful asset for a beneficiary to receive, since income (including realized gains) received by the Roth IRA is not subject to income tax, and distributions from the Roth IRA are also not subject to income tax. However, the owner of an IRA is subject to income tax on the full value of the assets converted from a standard IRA to a Roth IRA. In most circumstances, it only makes sense to convert to a Roth IRA if the owner knows that a future beneficiary’s marginal income tax rate when receiving distributions from the IRA would be higher than the owner’s marginal rate at the time of the conversion. However, if the owner is likely to die soon after the conversion and has an estate that is subject to estate tax, the beneficiary could ultimately save considerable tax if the owner converts prior to dying, since the funds used by the owner to pay the tax on the conversion would no longer be subject to estate tax at his or her death, thereby reducing the overall amount subject to estate tax and leaving a 100% tax-free asset for his or her beneficiaries. Depending on the ratio of taxable to IRA assets in the owner’s estate, the ultimate savings for a beneficiary upon termination of the Roth IRA 10 years after the owner’s death ranges between 10% and 60%, with many situations yielding a 10%-15% increase in total assets in the hands of the estate beneficiary 10 years after death.

Please contact the Seward & Kissel Trusts & Estates group if you have a large IRA and would like to discuss how the SECURE Act might impact your estate plan.


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