Changes to Retirement Planning: Understanding the SECURE Act
In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, which has implications for retirement planning.
To help you understand those implications — including their potential impact on your plans for charitable giving — we have engaged two experts from our Professional Advisors Council, Julia McVey and Heidi Gassman, to break down the SECURE Act.
[Note: Some responses have been edited.]
CFF: Thank you for partnering with Community First Foundation through our Professional Advisors Council. Can you tell us who you serve and what your specialty is?
JULIA MCVEY: I am an attorney whose focus is helping clients with their estate planning, wealth transfer needs and providing assistance with probate and trust administration. Additionally, my firm prepares marital agreements, provides charitable planning and assists clients with guardianship/conservatorship matters.
HEIDI GASSMAN: I am an attorney and a partner with Moye White LLP in Denver. My practice primarily revolves around trust, estate, and tax planning and administration and real property work, although I also touch on a fair amount of business/corporate practice and commercial contracts and leases.
CFF: In your words, what is the SECURE Act? What are the most important changes the SECURE Act brings with it? Who will be the most affected by the changes?
GASSMAN: The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act is a new set of federal laws which took effect on January 1, 2020. The Act was meant to make saving for retirement easier and more accessible for many Americans and also to act as an incentive to businesses to set up employer-sponsored retirement plans. It contains significant changes to previously existing laws governing federally regulated retirement plans, including IRAs and 401ks.
The most visible and positive change affected by the SECURE Act is to raise the age for taking required minimum distributions from traditional IRA and 401k accounts from age 701⁄2 to age 72. This change acknowledges that owners of these accounts are living and working longer, and often wish to hold off on taking taxable distributions from their retirement accounts for as long as possible.
The SECURE Act also removes the age cap for funding traditional IRAs, provides for limited retirement plan participation for long-term part-time employees, and allows families to take limited (up to $10,000 per beneficiary and each of their siblings) tax-free distributions from 529 plan accounts to repay student loans.
The individuals who will be most affected by these changes are retirement account owners who are over age 70 and are still working, or who would like to continue to fund their traditional IRAs beyond age 70.
The SECURE Act’s less visible and less positive changes have to do with what happens to IRA and 401k accounts after the death of their owners. Under previous federal law, it was possible to “stretch” the distribution of assets from an inherited IRA or 401k over the life expectancy of the beneficiary who inherited the account.
The SECURE Act has changed these rules substantially. Now, most designated beneficiaries of a retirement account will be required to receive the full amount of the account’s assets no later than 10 years after the death of the person who funded the account [with specific exceptions].
The individuals who will be most affected by these changes are those who have significantly funded retirement accounts ($500,000 and up) and who will not be survived by a spouse or a disabled person who can still take advantage of a “stretch” of the inherited account over their expected lifetimes.
CFF: Community First Foundation offers IRAs that support multiple nonprofits in one charitable distribution. Will the Secure Act change those IRAs in any way?
MCVEY: Donors will still be able to support multiple nonprofits with one charitable distribution. However, the $100,000 annual limit on qualified charitable contributions is reduced by the amount of deductible IRA contributions after age 70 ½. For example, if an individual contributes $5,000 to their traditional IRA at age 71, the annual limit on qualified charitable contributions for that individual would be reduced to $95,000.
GASSMAN: The SECURE Act shouldn’t change the Community First Foundation’s IRA giving program, but I do generally recommend that account owners who are philanthropically inclined and who own one or more substantially funded retirement accounts (as noted above, $500,000 and over in assets) take proactive steps to manage where those funds go both during their lives and at their deaths, now that they no longer have the lifetime stretch option for a non-spouse, non-disabled individual beneficiary. Options for these account owners include:
- taking advantage of Community First Foundation’s “Giving eCard” IRA charitable distribution program as part of any strategy of lifetime charitable gifting;
- naming a charity as one beneficiary (or the sole beneficiary) of the retirement account, to accomplish philanthropic goals and take advantage of the charitable tax deduction; and
- naming a charitable remainder trust as the sole beneficiary of the retirement account, providing for payments to a spouse or children upon the death of the retirement account owner with payment of the remaining assets to one or more charities upon the deaths of the lifetime beneficiaries.
CFF: Is there anything else that you feel donors and financial advisors should know about IRAs and the Secure Act?
MCVEY: The Act contains some ambiguities which will hopefully be clarified when the IRS publishes regulations pertaining to the law. But in the meantime, individuals whose assets consist of large IRAs should review their estate planning documents to see if their plan should be adjusted.
An estate planning tool which can provide a potential workaround to the 10 year rule is with the use of a Charitable Remainder Trust (CRT). A CRT is required to distribute a percentage of trust assets (at least 5%) to one or more individual beneficiaries for the beneficiary’s life or for a term of up to 20 years, with the remainder going to charity. Such a trust potentially would allow for a longer distribution period.
GASSMAN: I have been talking with my clients about reviewing their retirement account beneficiary designations to make sure that if one or more trusts are named as beneficiary, the appropriate provisions in their trust agreements support that designation now that the law has changed (that is, whether a “see-through” or “pass-through” trust still works), in addition to looking into naming a charitable remainder trust as the beneficiary of a retirement account as noted above.
Conversions of traditional IRAs to Roth IRAs may be appropriate for some clients as well, especially those who wish to pass retirement account assets into a trust after death for the benefit of a spendthrift beneficiary or a beneficiary who has a disability which is not recognized by the federal government. Distributions from Roth IRAs are not subject to tax because contributions are made to those accounts from “after-tax” earnings. Because of this tax treatment, the entire amount of a Roth IRA may be distributed to a trust without any tax consequences or a 10-year stretch can be taken advantage of to maximize tax-free earnings inside the Roth IRA over those 10 years. The downside of a Roth conversion is that taxes will be paid in full on the assets of the retirement account at the time of the conversion at the taxpayer’s applicable income tax rate/bracket for that year.
To learn more about Community First Foundation’s Giving eCard IRA charitable distribution program and other vehicles for charitable giving, contact Community First Foundation’s Philanthropic Services at 720.898.5900 or philanthropy@CommunityFirstFoundation.org.