The SECURE Act, passed in 2019, changed some rules about individual retirement accounts (IRAs). Now, people can keep putting money into their IRAs after they turn 70-1/2, and they have to start taking money out at age 72 instead of 70-1/2. Also, if someone inherits an IRA, they have to take the money out within 10 years, unless they are the spouse, a minor child, disabled, or chronically ill, in which case they can stretch out the payments. If the beneficiary is not one of those, they have to take the money out within 5 years. If the person who died had money in an IRA, their spouse can take out the money over their own life expectancy. They can also roll the IRA into their own account and wait until they’re 72 to take out money. If the person who died didn’t have a spouse, someone who is not more than 10 years younger than them can also take out the money over time. But if the person who died named someone else as the beneficiary, that person might have to take out all the money within 10 years. If the parent of a child dies, the child can get the parent’s retirement money using the life-expectancy method until the child turns 18. After that, they have 10 years to take the money. But if the child is still in school and under 26, they may be able to keep getting the money until they are 36. This rule only applies to the parent’s minor children, not to grandchildren or other minors. If someone is disabled or very sick, they can also get the money for their lifetime. But they have to meet certain rules from the IRS to prove they are disabled or sick. If someone is healthy when their parent dies but then gets sick later, they can’t switch from the 10-year rule to the life-expectancy rule for taking the money. Under the new SECURE rules, a trust for disabled or chronically ill beneficiaries can still qualify for stretch distribution payouts. If someone died before 2020, their beneficiaries can still follow the old rules for stretching out distributions. For people who died in 2019, their beneficiaries should consider using disclaimers to take advantage of the old rules. When the 10-year rule applies, the entire IRA account must be paid out within 10 years, but spreading distributions over 11 years can help beneficiaries defer and reduce taxes. The new 10-year rule for inherited IRAs means that beneficiaries have to take out all the money within 10 years, instead of spreading it out over their lifetime. This could lead to a lot of taxable income in a short amount of time. It might be best for beneficiaries to plan their withdrawals carefully to minimize the taxes they have to pay. If they have a Roth IRA, they might want to wait as long as possible before taking out the money, to keep it growing tax-free. If they have a traditional IRA, they might want to spread out their withdrawals over time to avoid a big tax bill at the end. This new rule could affect people with big retirement accounts, a small number of beneficiaries, high income tax rates, grandchildren as beneficiaries, and trusts receiving the money. Here are some ways clients can deal with the new retirement account rules:
1. Save less money in your retirement account if you’re still working.
2. Take money out of your taxable accounts faster if you’re over 59-1/2.
3. Split up your retirement account differently when you pass it on to your family.
4. Consider converting your retirement account to a Roth account, which can have tax benefits. If you want to help charities with your IRA money, there are a few options. You can give money directly from your IRA to charity during your lifetime or when you pass away. You can also set up a special kind of trust to receive your IRA money when you die, and then the trust pays out money to a person for their lifetime and then whatever is left goes to charity. You can even combine these strategies to help reduce the taxes that your loved ones might have to pay on the money they get from your IRA. Some other types of trusts are also still good options, but they might not be as helpful for saving on taxes. Conduit trusts are a type of trust that require all money from an IRA to be given to the trust beneficiary right away. These trusts can still work well for certain people, like a spouse, a young minor child, or someone not much younger than the owner. They can still stretch out their payments over time. It’s important to be careful when creating these trusts to make sure they qualify for the stretch payment rules. Conduit trusts, which distribute inherited IRA assets to beneficiaries over their lifetime, are no longer the best option for most beneficiaries. Instead, accumulation trusts, which give the trustee more flexibility in how they distribute the IRA assets, are becoming more popular. However, accumulation trusts may be taxed at a higher rate if the assets are not distributed to the beneficiaries. Trustees will need to carefully balance minimizing taxes with protecting the trust assets. Using an accumulation trust that benefits many individuals may be a good option, as it can spread the taxable income among different taxpayers, potentially resulting in lower tax rates. There are still many unanswered questions about using trusts for inherited retirement benefits, and it’s important to be cautious and seek guidance from professionals. The SECURE Act changes the rules for retirement savings. Now, people can keep contributing to their retirement savings after they turn 70-1/2, and they have more time to start taking money out of their retirement accounts. Also, a rule about how kids are taxed on their investment income has been changed. If you’re over 70-1/2, you can also give money from your retirement account directly to charity. But it’s important to actually want to donate to charity if you’re going to do this. If someone with an IRA account dies and has a special kind of trust, a court may be able to change the trust to help with taxes and keep money safe for the person who is supposed to get it. The trust should be updated to make sure it follows the right rules, but still can’t give money to charities. There’s a type of trust for someone who is sick or disabled that can get money over a long time. But if the trust is for a spouse, it might not get money for a long time. If someone wants to pay as little tax as possible, they should think about that when making the trust. But usually, taxes aren’t the most important thing when making a trust for retirement money. Creative planning options for estate and tax management include the beneficiary deemed owner trust (BDOT) and the tax efficient accumulation (TEA) pot trust system. These options can help minimize taxes and protect assets. This information is provided by the Real Property, Probate and Trust Law Section.
Source: https://www.floridabar.org/the-florida-bar-journal/overcoming-retirement-plan-in-secure-ity/
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