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Welcome to Part 2 in the Who, What, and When of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. If you missed Part 1, which addressed the two most publicized changes within the SECURE Act: the push back of the start date for *Required Minimum Distributions from retirement plans, and the semi-elimination of the ability to “stretch” inherited retirement plan distributions, you can view it here: SECURE Act Part 1. 

In this post we will cover a variety of topics, so read on if you find yourself within any of these five groups:

  • you have a trust named as the beneficiary of your retirement plan;
  • are age 70+ and are still working;
  • are a 529 college savings plan account owner or beneficiary;
  • anticipate making a charitable donation from your IRA account; or
  • have incurred (or will incur) adoption-related expenses

And if you happen to fall in all five of the above-referenced categories, then please consider either taking a nap or writing a book on time management!

A quick side note before we delve in: If, after reading Part 1 of this topic, you felt like these changes came unexpectedly you are not entirely mistaken. While many of the components of the SECURE Act had been in the public eye since passing the House in May 2019 (with an almost unanimous vote), its future remained in doubt until the Act was attached (somewhat last minute) to the appropriations bill lawmakers needed to pass to fund the federal government’s operations through September 30, 2020.


10-Year Distribution Rule Impact on Some Estate Plans

Part 1 of the series addressed the impact to individuals named as direct beneficiaries of retirement plans where the owner passes away January 1, 2020, or later. In addition, the SECURE Act’s 10-Year distribution rule also introduces a potential problem within some estate plans utilizing a trust as the beneficiary of a retirement plan(s). These trusts (known as “conduit” or “pass-through” or “see-through” trusts) previously allowed retirement account dollars to be controlled by the trust. As a result, the required minimum distribution calculation could “see-through” the trust to the oldest beneficiary and then base distributions on that beneficiary’s life expectancy.

A problem may arise in this scenario when the language used in a trust document allows the Trustee to only distribute the “minimum” amount to the trust beneficiaries. Under the new 10-Year distribution rule there is technically not a minimum amount required until the 10th year following an owner’s death. This pushes distributions to a single tax year, year 10, possibly resulting in a larger tax payment for the beneficiaries by virtue of increasing their taxable income in that lone year.

Also, a retirement account owner that intended for a beneficiary to receive relatively small distributions over his/her lifetime could now be faced with the possibility of the beneficiary receiving the entire retirement account balance within 10 years!

EXAMPLE: In Part 1 we referenced the death of former New York Yankees pitcher Don “Gooney Bird” Larsen who passed away on January 1, 2020, making him (and his estate plan) subject to the new SECURE Act law. While we don’t know the details of his financial life, in 2016 Larsen chose to auction the uniform he was wearing when he pitched the only perfect game in World Series history. The uniform sold for $756,000 and Larsen commented he planned to use a portion of the proceeds for his grandchildren’s college education.

 If Larsen’s desire to help his grandchildren financially included utilizing a conduit or “see-through” trust in which his grandchildren are beneficiaries of an IRA then his family may experience some unintended ramifications.

Under the “old” RMD rules an age 28-year-old grandchild would only have been required to receive between 1.8% -2.2% of the IRA each year over the coming 10 years. For a $1 million IRA balance that equates to about $18,000 annually in required distributions. However, under the new rules, a 28-year-old may instead receive a lump-sum payment in 2030 (Year 10 after Don’s death) of the $1 million IRA account balance. The payment, which is taxable as ordinary income, would incur a material tax liability with as much as half the account value subject to the maximum federal tax rate of 37%.

The question for many estate plans using conduit or “see-through” trusts is this: Is the trust structured properly to prevent the outright distribution of the entire IRA over 10 years? The need for retirement account owners to consult with their estate attorney to determine the impact to their own unique estate plan, and whether a trust should be reanalyzed and potentially restructured, cannot be overstated.


Traditional IRA Contributions for those age 70+

The SECURE Act also puts Traditional IRA contributions on par with all other retirement plans by now allowing an individual to make a contribution in the year in which they turn 70.5.

Previously, Traditional IRAs were the only retirement accounts for which contributions were not permitted for those age 70.5 and older. It is important to note this provision is forward-looking to those attaining age 70.5 in 2020, as 2020 (and not 2019) is the first tax year this is allowed.

Only those individuals still working, and thus with earned income, will be eligible to take advantage of this new law. Notably, those who have a spouse that is still working would also be able to contribute under the Spousal IRA rules.

EXAMPLE: Meryl Streep, who reached age 70.5 in late 2019, was unable to contribute to a Traditional IRA for the 2019 tax year. However, the SECURE Act removes that barrier and the 20-time Academy Award-nominated actress is now eligible to put away a portion of her earned income in a Traditional IRA in 2020 and beyond. (Note: the deductibility of that contribution may still subject to earnings limits if either she or long-time husband Don Gummer are eligible to participate in an employer-sponsored retirement plan).


No Change to the Qualified Charitable Distribution (QCD) Age

With the push back of the RMD beginning age from age 70.5 to age 72, you might anticipate the SECURE Act likewise chose to push back the Qualified Charitable Distribution (QCD), or “charitable IRA rollover,” age as well. However, there is no change to individuals being eligible to make a distribution from their IRA directly to a charitable organization upon reaching age 70.5.

Two notable items related to QCDs are the requirement the account owner be age 70.5 on the date of the distribution to the charity, not simply attain age 70.5 sometime during the calendar year. Also, the SECURE Act does include a rule to prevent abuse of QCDs when paired with age 70.5+ Traditional IRA Contributions. In short, QCDs will be reduced by the total Traditional IRA contributions made after age 70.5 (and that are claimed as a deduction).


529 College Savings Plan Eligible Expenses Expansion

The Tax Cuts and Jobs Act passed in late 2017 expanded the tax-free use of 529 plan dollars to K-12 expenses (up to $10,000 annually). Now the SECURE Act adds to the flexibility of tax-free use of funds by including Apprenticeship Programs (expenses for fees, books, supplies, and required equipment are now considered a qualified education expense).

Another notable change for 529 plans is the introduction of “Qualified Education Loan Repayments” as a qualified education expense. Distributions can now be made from a 529 plan, up to a lifetime amount of $10,000 per-person, toward student loan principal and/or interest. Also, an additional $10,000 may be distributed as a qualified education loan repayment toward student loan debt for each of a 529 plan beneficiary’s siblings.


Penalty-free IRA Withdrawal for Adoption Related Expenses

Typically, a withdrawal from a retirement plan incurs a 10% penalty if the owner is not yet age 59.5 or older. A few exceptions to this rule have been in existence for years allowing a waiver of the penalty in cases of a disability, certain medical expenses, higher education costs, and the purchase of a home for the first time.

The SECURE Act adds to this list by allowing up to $5,000 per child for expenses incurred as part of a

Qualified Birth or Adoption. The IRA owner must take the distribution at any point during a one-year period beginning on either the date of the adopted child’s birth or the date on which the child’s adoption (for a child under the age of 18) is finalized.

Note that this exception is allowed by each IRA account owner, so parents that both have an IRA account could each utilize the $5,000 provision in order to withdraw a total of $10,000 toward adoption expenses for a single child. If the couple chose to adopt again in the future, they could again utilize as much as $10,000 toward the expense of the second adopted child.

The Who, What, and When details of the SECURE Act covered in this post and Part 1 are far-reaching. Undoubtedly they will result in a great deal of planning by retirement account owners, beneficiaries, and their trusted advisors to determine its impact on individuals and families.

However, the Why of the SECURE Act may have already been answered by the Congressional Research Service. That report shows, as a whole, the Act projects to generate an additional $16.4 billion in tax revenue over the coming decade. To help ensure you are prepared to pay your fair share (but hopefully no more!) reach out to your Bridgeworth advisor today.

* Upon reaching 70 ½, IRS requires a minimum withdrawal from all IRAs and retirement plans with exception of Roth IRA.

Bridgeworth, LLC does not provide tax or legal advice.

This material is educational in nature.  The implications and risks of a transaction may be different from individual to individual based upon past estate, gift and income tax strategies employed and each individual’s unique financial and familial circumstances and risk tolerances. 

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to the accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Before investing, investors should consider whether their home state or their designated beneficiary’s home state offers any state tax or any other benefits that are only available to residents of that state. Any state tax benefits associated with a 529 plan apply only to residents of the state sponsoring the plan. 529 plans value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost.

Investors should consider the investment objectives, risks, and charges and expenses of the plan carefully before investing. An official statement, which contains this and other important information, can be obtained from your financial professional. Please read carefully prior to investing.

Withdrawals may be subject to state income taxes depending on the participant’s state of residence. Non-qualified withdrawals are subject to a 10% penalty. 

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