By: AnnaMarie Mock, CFP®
The President signed The Setting Every Community Up for Retirement Act (SECURE Act) into law on December 20, 2019, and many of the changes became effective on January 1, 2020. In an earlier article, “SECURE Act”, we discussed the basics of what the SECURE Act intended to accomplish.
Stretch Provision
One of the most notable changes in terms of financial planning is the elimination of the “stretch” provision for most non-spouse beneficiaries of inherited retirement accounts. Previously, non-spouse beneficiaries could take their required minimum distributions (RMDs) over their life expectancy, allowing the assets to grow tax-deferred. The “stretch” provision still applies to individuals that inherited an IRA account before January 1, 2020.
10-year Rule
For some beneficiaries that inherit retirement accounts in 2020, they will have to follow the new “10-Year Rule” under the SECURE Act. The entire balance of the inherited retirement account must be paid out by the end of the 10th year from the year the account was inherited. The beneficiary will have the flexibility to determine the timing and amounts of the distributions over the 10-year time period, which can provide some planning opportunities.
The 10-Year Rule does not apply to eligible designated beneficiaries like spousal beneficiaries, disabled beneficiaries, chronically ill beneficiaries, individuals less than ten years younger than the decedent, and minor children of the IRA owner until they reach the age of majority. The prior “stretch” provision applies to any eligible beneficiary.
The changes introduced by the SECURE Act make it necessary to review the retirement accounts, especially when a trust is listed as a beneficiary. Typically, trusts created for the sole purpose of being a retirement account beneficiary were crafted under the “see-through” trust rules, allowing the trustee to stretch distributions over the oldest trust beneficiary’s life expectancy.
Conduit Trusts
Conduit trusts were a typical “see-through” trust option for individuals that wanted to maintain control of the inherited IRA at their passing. A conduit trust denotes that only RMDs can be withdrawn from the account annually, which may cause an issue with the SECURE Act provision.
Technically under the SECURE Act, only the 10th year has an RMD. Due to the flexibility of when to make distributions, someone could wait until the tenth year and withdraw all the funds in one distribution. This could result in an entire balance being paid in one year which could result in a large tax bill for the beneficiary. It is unclear as to how the IRS will treat distributions of see-through trusts. Still, we expect final regulations to be issued soon that should provide more clarity, allowing attorneys and financial advisors to create planning and legacy opportunities in the future.
If you have any questions, please do not hesitate to reach out to the HIGHLAND team.
Author’s Bio
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.