The Setting Every Community Up for Retirement Enhancement Act (or SECURE Act) brings on changes designed to make it easier for people to save for retirement and also makes retirement plans more accessible to a larger number of individuals. While it benefits those wanting to save more for retirement, it may negatively impact non-spouses receiving distributions from an inherited IRA and makes it complicated for individuals who named a trust as a beneficiary to their IRA.
What Are the Main Changes Brought on by the Secure Act?
The SECURE Act has brought the ability for parents to withdraw up to $10,000 penalty-free (but not tax-free) on the year of the birth or adoption of a child. Another positive change is the ability for individuals to withdraw up to $10,000 from a 529 account to repay student loans.
It also increases the age for required minimum distributions from 70 ½ to 72 years of age, which allows you to keep your money invested for two years longer (unless you retire during that period). There is also no age cap for contributions to an IRA, since many people are now working past the age of 65. If you are working and still receiving earned income, you may continue to contribute. If you work part-time, you are now eligible to enroll in your company’s 401(k) plan, starting in 2024.
How Do the New Rules Impact Trusts?
Because IRA distributions are subject to tax, it used to be possible to “stretch” out the distributions from an inherited IRA account over an individual’s lifetime to minimize income tax payments. The SECURE Act now requires these inherited IRA accounts to be completely emptied on the 10th anniversary of the death of the original owner of the IRA account. This means that if you inherited an IRA with significant funds, you will be required to empty the entire account and likely deal with a large tax bill on year 10, rather than being able to take smaller distributions throughout your lifetime.
If you inherited an IRA that was set up as part of a conduit trust, you must seek the help of an attorney or financial advisor. If your trust has provisions that cap your yearly required minimum distributions, you may have trouble with being able to empty the account at the 10-year mark, as required by the new rules. If you have an IRA account that you want to pass on to a non-spousal beneficiary (such as a child or sibling) through a conduit trust, you must consult your financial advisor or estate planning attorney to update the provisions in your trust, allowing for the withdrawal of funds after 10 years.
What Can I Do to Minimize the Impact of the 10-Year Rule on My IRA Trust?
If you have an IRA conduit trust with multiple beneficiaries, including non-spousal beneficiaries, the best thing you can do to minimize the impact of the 10-year rule brought on by the SECURE Act is to update your trust terms or completely replace your trust, if it makes sense to do so. The 10-year rule can technically defeat the purpose of a conduit trust, which is to have some post-death control over how and when your retirement funds are spent.
Remember, once you pass away, all the terms in your trust become irrevocable and cannot be changed. For that reason, it is highly advisable to sit down with your estate planning professional and review your current trusts. Oren Ross & Associates is available to assist you with all your trust and estate planning needs. Call us at (404) 436-1752 to schedule an appointment.