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Estate Planning & Administration Alert -
Stretch, IRAs and the Setting Every Community Up for Retirement Enhancement (SECURE) Act
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Many clients have embraced the notion of guiding their children or other IRA beneficiaries to "stretch" distributions over the life expectancy of the child or other younger beneficiary. Stretching the distributions over the beneficiary's life expectancy was a powerful income tax planning option since beneficiaries could let more of the account grow on a tax-deferred basis. The stretch IRA rules were modified substantially when, on December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The SECURE Act passed with broad bipartisan support and is intended to expand retirement savings opportunities for workers.
Some of the key benefits for individuals are as follows:
- Required minimum distributions from retirement accounts will now begin later (age 72 instead of age 70.5). This means there will be more time for savings to grow on a tax-deferred basis.
- Traditional retirement account contributions may now continue after age 70.5.
- Employees may withdraw up to $5,000 tax-free from a retirement account for the birth or adoption of a child.
Some of the key benefits for businesses are as follows:
- There will be fewer limitations on the setup of multi-employer 401(k) plans.
- Businesses will have expanded access to annuities as savings options within 401(k) plans.
- Small employers will be entitled to a $500 tax credit if they implement automatic enrollment in their retirement plans.
Unfortunately, there is also a downside under the SECURE Act. All of the positive changes highlighted above come at the expense of the elimination of the stretch IRA. Importantly, under the SECURE Act beneficiaries of inherited IRAs now must withdraw the entire IRA balance within ten years of the death of the account owner.
There are a few important notes about the new ten-year rule:
- There are no required distributions in years one through nine. The only requirement is that the account have a zero balance at the end of the ten-year period after the owner's passing.
- The ten-year rule will not apply to surviving spouses (who will still be able to assume the inherited IRA as his or her own), beneficiaries who are less than ten years younger than the account owner, chronically ill individuals, disabled individuals, or minors. The ten-year requirement for minors will take effect at the age of majority, which is age 18 or age 21 depending on the state.
- This only applies to IRA inheritances occurring after January 1, 2020. All existing inherited IRAs as of December 31, 2019, are grandfathered.
Prior retirement strategies that hinged on the use of the stretch may no longer make sense, but converting a traditional IRA to a Roth IRA could now be a viable alternative.
Individuals who inherit an IRA must now consider the tax consequences of the required distributions within ten years of the account owner's death. Spreading the distribution out over the decade may be more advantageous than a single lump sum distribution in year ten. There may also be opportunities to match distributions with years that have higher losses or deductions. These are important new rules that will impact the management of IRAs into the future.
As part of the SECURE Act, small businesses interested in providing a retirement plan for employees should revisit the conversation. Previously unavailable plans may now be more attractive options. Individuals should revisit their retirement plans in light of the extended age of required minimum distribution and the new ability to contribute to IRAs past age 70.5.
Employers and individuals should proceed with caution when offering or selecting an annuity product within a 401(k). All annuities are not created equal, nor are they right for every retirement plan. Due diligence is critical to ensure the right fit.
If you were counting on the stretch option for your children or younger beneficiaries, please keep the foregoing new limitations in mind. We remain available to assist in the analysis of the foregoing as it may impact your estate plan. For our business clients, we are available to assist in the analysis of plan options that may be of interest. Contact us at 503.228.6044 or at any of the email addresses below for assistance.
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Dean Sandow
assists business owners, executives, professionals, families, family enterprises, and individuals plan for all stages of business and life, with an emphasis on creative use of entities, trusts, and planning techniques to maximize efficiency and tax savings and minimize administration. With a keen understanding of entity structure and management, Dean creates plans to enhance and manage assets for the client and for next generation or beyond.
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Steve Bennett
helps create estate plans tailored to client objectives, and reviews existing estate plans to ensure they are up-to-date with state and federal tax laws, applicable state laws, and evolving family structures and goals. He represents singles and couples (and particularly high net-worth clients) in the preparation of wills and trusts, complex estate analysis, probate and estate administration, estate and income tax planning, asset transfers and ownership analysis, estate and trust dispute resolution, and business succession planning.
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Brian Jolly
's
law practice focuses on corporate and general business matters, as well as estate and succession planning. With more than a decade of experience representing families, closely-held businesses, and non profit organizations, Brian brings considerable working knowledge in the areas of business formation, mergers and acquisitions, and internal and external disputes in a multitude of business and estate planning matters.
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Melissa Chapman
practices in a variety of areas including estate planning and administration, commercial and estate litigation, business and real estate law. She is a skilled communicator and advocate for her clients, providing sound and practical guidance at each state of the case.
Melissa specializes in probate and trust administration and related litigation, estate planning, and conservatorships and guardianships.
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Margot Seitz
is a compassionate attorney who enjoys helping her clients navigate through the complex world of estate planning and administration
. In her estate planning practice, Margot specializes in probate, trust administration, conservatorships, and elder abuse litigation. Margot works closely with clients to make sure that their needs and wishes come first, regardless of whether she is preparing a will or assisting a client after the death of a loved one. Margot has also developed a specialty in handling creditor disputes in the context of estate administration.
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Megan Oshiro
supports the firm's business, estate and succession planning, financial services and real estate practices. Megan's internship at Willamette's Business Law Clinic, Oregon DOJ in the Financial Fraud and Consumer Protection Section, and externship with the Adidas in-house counsel in Portland bring excellent skills and working knowledge to her practice.
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