SECURE Act

SECURE Act 2.0: Later RMDs, 529-To-Roth Rollovers, And Other Tax Planning Opportunities

December 28, 2022 07:03 am 4 Comments CATEGORY: Taxes

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, brought a wide range of changes to the retirement planning landscape, from the death of the ‘stretch’ IRA to raising the age for Required Minimum Distributions (RMDs) to 72. And nearly 3 years to the day after its predecessor was passed, the U.S. House of Representatives, on December 23, 2022, passed the Consolidated Appropriations Act of 2023, an omnibus spending bill that includes the much-anticipated and long-awaited retirement bill known as SECURE Act 2.0.

One of the major headline changes from the original SECURE Act was raising the age for RMDs from 70 ½ to 72, and SECURE 2.0 pushes this out further to age 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later. In addition, the bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%.

In addition, SECURE 2.0 includes a significant number of Roth-related changes (both involving Roth IRAs as well as Roth accounts in employer retirement plans), though notably, the legislation does not include any provisions that restrict or eliminate existing Roth strategies (e.g., backdoor Roth conversions). These changes include aligning the rules for employer-retirement-plan-based Roth accounts (e.g., Roth 401(k) and Roth 403(b) plans) with those for individual Roth IRAs by eliminating RMDs, creating a Roth-style version of SEP and SIMPLE IRA accounts, allowing employers to make matching contributions and non-elective contributions to the Roth side of the retirement plan instead of just the pre-tax portion (though participants will be subject to income tax on such contributions), and allowing for transfers from 529 plans to Roth IRAs (with significant restrictions).

SECURE 2.0 also includes several measures meant to encourage increased retirement savings. These include making IRA catch-up contributions subject to COLAs beginning in 2024 (so that they will increase with inflation from the current $1,000 limit), while also increasing 401(k) and similar plan catch-up contributions; creating a new “Starter 401(k)” plan (aimed at small businesses that do not currently offer retirement plans; such plans would include default auto-enrollment and contribution limits equal to the IRA contribution limits, among other features); and treating student loan payments as elective deferrals for employer matching purposes in workplace retirement accounts, which would allow student loan borrowers to benefit from an employer match even if they can't afford to contribute to their own retirement plan.

Ultimately, the key point is that while no single change in SECURE 2.0 will require the same level of urgency to consider before year-end changes to clients’ plans as did the original SECURE Act or have the same level of impact across so many clients’ plans as the elimination of the stretch, there are far more provisions in SECURE 2.0 that may have a significant impact for some clients than there were in the original version, making it a more challenging bill for financial advisors and other professionals to contend with (yet providing many new potential opportunities)!

The Impact Of New IRS Proposed Regulations On The SECURE Act: RMDs, Eligible Designated Beneficiaries, Trusts, And More!

March 2, 2022 07:03 am 18 Comments CATEGORY: Taxes

When the SECURE Act was signed into law in December 2019, it ushered in some of the most significant changes to the rules for retirement accounts in well over a decade. At the same time, however, the statutory language included a number of provisions that were either ill-defined or left open to substantial IRS interpretation. To fill this gap, the IRS issued Proposed Regulations on February 23, 2022, to reflect the changes to the Internal Revenue Code made by the SECURE Act. The Proposed Regulations are likely to be amended at least somewhat before they are finalized, but they do provide the best window into the IRS’s current thinking on a variety of issues.

For many individuals, the most significant change made by the SECURE Act was the introduction of the 10-Year Rule, under which most non-spouse beneficiaries are required to distribute the entirety of their inherited retirement accounts by the end of the tenth year after the decedent’s death. But while the general consensus among practitioners was that such Non-Eligible Designated Beneficiaries would be allowed to distribute the entire account as a lump sum at the end of the 10^th year instead of taking annual distributions to empty the account, the new Proposed Regulations seek to implement a system that would require Non-Eligible Designated Beneficiaries inheriting from retirement account owners who died on or after their Required Beginning Date to comply with the 10-year distribution requirement in addition to taking annual RMDs during that period.

The Proposed Regulations also clarify who can be considered an Eligible Designated Beneficiary (and who are able to use the previous ‘stretch’ RMD rules rather than the 10-Year Rule), including the decedent’s minor children, considered minors until they reach their 21st birthday regardless of the age of majority defined by state laws. Which means that minors would use the ‘stretch’ RMD rules until their 21st birthday, and then be subject to the 10-year rule and potential continued RMDs (if the decedent had reached their Required Beginning Date).

Furthermore, the Proposed Regulations provide significant new guidance on trust beneficiaries of retirement accounts, proposing that much of the existing trust-as-a-retirement-account-beneficiary structure be left in place, including the requirements for a trust to qualify as a “See-Through Trust” and the concepts of Conduit and Discretionary Trusts. In addition to continuing to allow remainder beneficiaries of a Conduit Trust to be disregarded when determining the post-death payout schedule of a See-Through Trust named as the beneficiary of a retirement account, the Proposed Regulations also outline other new types of Discretionary Trust beneficiaries that can be disregarded, including secondary beneficiaries who can only inherit trust assets contingent on the death of another secondary beneficiary, and beneficiaries who can only receive distributions of retirement assets from a trust that are first required to be fully distributed to a minor trust beneficiary before the end of the year in which they reach age 31 (provided that they survive to that age).

In a departure from IRS historical norms, the Proposed Regulations would prevent a general power of appointment from causing a trust to fail to meet the See-Through Trust requirement that beneficiaries of a trust be identifiable (given that certain requirements are met). Additionally, in the event that a trust is modified via a method provided for under state law, any trust beneficiaries removed via such a process by September 30^th of the year following the year of death will not be considered when determining the trust’s post-death payout schedule.

Ultimately, the key point is that the IRS’s recent Proposed Regulations provide important insight and clarity on several aspects of the SECURE Act, of particular relevance to certain Non-Eligible Designated Beneficiaries and those with trusts. And while the Proposed Regulations can still be amended before they are finalized, taxpayers (and their advisors) can start preparing themselves now for how their individual situations might be affected!

Why Discretionary See-Through Trusts May Require Reform After The SECURE Act’s 10-Year Rule

May 27, 2020 07:06 am 2 Comments CATEGORY: Retirement Planning

The passage of the SECURE Act in December of 2019 introduced several notable changes to the rules governing retirement accounts. One of the most significant was the elimination of the ‘stretch’ provision applicable to most non-spouse Designated Beneficiaries of inherited retirement accounts. Instead of allowing such beneficiaries to continue ‘stretching’ their distributions over the span of their own lifetimes, the SECURE Act now requires that certain beneficiaries deplete their inherited retirement accounts by the end of the 10th year after the year of the account owner’s death. And while that poses challenges when planning for individuals who are retirement account beneficiaries… the planning challenges increase exponentially for “See-Through” Trusts, which can also be designated retirement account beneficiaries.

See-Through Trusts are treated as a Designated Beneficiary (by “seeing through” to the underlying beneficiaries) of an inherited retirement account and come in two basic forms – a “Conduit Trust” and a “Discretionary Trust”. Whereas conduit trusts require all distributions from an inherited retirement account received by the trust to be passed out (i.e., “conduited”) to the trust beneficiaries each year, discretionary trusts allow for the build-up of distributed dollars within the trust. Under certain circumstances, each type of trust can still take advantage of the stretch provision if the underlying beneficiaries can be considered Eligible Designated Beneficiaries, but See-Through Trusts will generally be subject to the 10-Year Rule if the underlying beneficiaries are Non-Eligible Designated Beneficiaries.

Applicable Multi-Beneficiary Trusts, meanwhile, can be used for trusts that have multiple beneficiaries (all of whom are people), when one or more of the beneficiaries is a disabled or chronically ill person. These trusts were established by the SECURE Act to help beneficiaries maintain their eligibility in certain means-tested programs such as Supplemental Security Income and Medicare. If Non-Eligible Designated Beneficiaries are named as beneficiaries to an Applicable Multi-Beneficiary Trust, the stretch provision can still apply to the disabled/chronically ill beneficiary (and would be based on the oldest beneficiary if all are disabled/chronically ill), provided the trust splits into a separate sub-trust for the disabled/chronically ill person immediately upon the account owner’s death.

The primary challenge that the SECURE Act imposes on discretionary trusts stems from the high trust tax rate – the income threshold for the maximum trust tax rate (37%) is only $12,950, versus the income threshold of $622,050 for the 37% personal income tax bracket for joint filers! And because any funds distributed from a retirement account to the trust will be taxed at the trust’s income tax rate if they are not subsequently distributed to the trust beneficiary in the same tax year, the tax liability that can result from distributions left in the trust can be substantial.

Some strategies that financial advisors can use to help clients maximize the post-tax value of inherited retirement account funds left to a Discretionary Trust include immediate Roth conversions of any distributions from the inherited retirement account, which especially makes sense when the account owner is in a lower tax bracket. If Roth conversions are not possible (e.g., if income is too high to permit them), using distributions to fund a life insurance policy can be a potential alternative strategy, but only if there is relative certainty that the funds won’t be needed during the account owner’s lifetime. Other strategies that permit distributions to be taxed at potentially lower individual income tax rates instead of the higher trust rates include providing the trustee with the freedom to time inherited retirement account distributions and creating a Discretionary Trust that allows a beneficiary to exercise a power of withdrawal over annual distributions made from the IRA to the trust.

Ultimately, the key point is that Discretionary Trusts, like Conduit Trusts, have been significantly impacted under the SECURE Act. Accordingly, it is crucial for advisors to know which clients have named a discretionary trust as part of their planning, and for those clients with special needs trusts, to ensure that they conform to applicable MBT guidelines. The low-income threshold for the highest trust tax rate bracket is a particular challenge for trust distributions and can be avoided by using Roth conversions immediately after distributions are made to the trust; timing distributions between inherited retirement accounts, the trust, and the beneficiaries; and providing the beneficiary with the power of withdrawal over annual distributions (when it makes sense to do so).

Restructuring Conduit Trust Beneficiaries Of Retirement Accounts To Avoid The SECURE Act’s 10-Year Rule

March 4, 2020 07:04 am 13 Comments CATEGORY: Retirement Planning

Passed in December of 2019, the SECURE Act brought several changes to the rules governing retirement accounts, the most significant of which (at least for financial advisors and their clients) was the elimination of the ‘stretch’ provision applicable to most non-spouse Designated Beneficiaries of inherited retirement accounts. Instead of letting such beneficiaries stretch distributions out based on their own lifetimes, inherited retirement accounts under the SECURE Act must now be emptied by the end of the 10th year after the year of death. Which is challenging when planning for retirement account beneficiaries… but is especially impactful for so-called “Conduit” Trust beneficiaries.

A Conduit Trust is a particular type of “See-Through” Trust that can serve as the (stretch) beneficiary of a retirement account. In order to be a Conduit Trust, all distributions from an inherited retirement account received by the trust must be passed out (i.e., “conduited”) to the trust beneficiaries each year. The appeal of a Conduit Trust is that beneficiaries named as a sole Income Beneficiary are essentially treated as if they were named directly on the account beneficiary form (i.e., allowing the trust to still take advantage of the ‘stretch’ provision if that conduit beneficiary is an Eligible Designated Beneficiary). However, Conduit Trusts whose conduit beneficiaries don’t meet the new “Eligible" Designated Beneficiary requirements – or have multiple Income Beneficiaries where at least one Income Beneficiary is not considered an Eligible Designated Beneficiary – can face significant new complications under the SECURE Act.

For Conduit Trusts with at least one Non-Eligible Designated Beneficiary, the ‘stretch’ provision is automatically eliminated and all funds from inherited retirement accounts must be distributed by the end of the 10th year after death! Accordingly, these circumstances with Non-Eligible Designated Beneficiaries, in particular, beg the question as to whether Conduit Trusts subject to the 10-Year Rule are even a viable solution for clients, especially in cases when the trust language limits distributions to “only” the Required Minimum Distribution. In such scenarios, no distributions can be made until the 10th year after death, when the entire account must be emptied all at once, since that is the only point during the 10-Year Rule when a distribution is actually required (resulting in a potentially huge tax liability in the process).

To help clients address the SECURE Act’s impacts on Conduit Trusts, advisors can start by taking a comprehensive inventory of all clients with trusts as retirement account beneficiaries and identifying those that are Conduit Trusts (which may require some legwork in attaining trust documents to review the trust language regarding distributions). The next step involves identifying all Income Beneficiaries of Conduit Trusts to assess whether the trust can still ‘stretch’ distributions (e.g., is the Income Beneficiary an Eligible Designation Beneficiary? If there is there more than one, are any Income Beneficiaries Non-Eligible Designated Beneficiaries?). Advisors should then proactively review with clients the implications of the 10-Year Rule on their estate planning strategies.

If an alternative to a Conduit Trust is deemed beneficial, the most straightforward alternative may be creating a new Discretionary Trust to replace the Conduit Trust as the retirement account’s Designated Beneficiary. While this route maintains post-death control over retirement assets, it comes at a potentially high cost, though, as Trust tax rates reach the 37% rate at just $12,950 (in 2020), versus $518,400 (Single) or $622,050 (Married Joint) for Individual taxpayers. Alternatively, Conduit Trusts can simply be replaced by the individual Income Beneficiaries themselves as the named beneficiaries of the retirement accounts.

Ultimately, the key point is that Conduit Trusts can be significantly impacted under the SECURE Act, especially when those Trusts have multiple beneficiaries, and even more so when at least one of those beneficiaries is a Non-Eligible Designated Beneficiary. Because with the 10-Year Rule in place, these trusts will potentially be required to distribute all retirement account assets on a 10-year schedule, after which they would no longer protect the retirement assets that they were designed to protect in the first place. Which makes it absolutely crucial to review, update, or potentially replace Conduit Trust beneficiaries of inherited retirement accounts… before the retirement account owner passes away, and the (potentially unfavorable) Conduit Trust rules are permanently locked in!

The (Partial) Death Of The Stretch IRA: How The SECURE Act Impacts Inherited Retirement Accounts

February 12, 2020 07:08 am 33 Comments CATEGORY: Taxes

Passed into law in December 2019, the “Setting Every Community Up For Retirement Enhancement (SECURE) Act”, introduced a plethora of substantial updates to longstanding retirement account rules. One of the most notable changes was the elimination (with some exceptions) of the ‘stretch’ provision for non-spouse beneficiaries of inherited retirement accounts. As prior to the SECURE Act, beneficiaries of inherited retirement accounts were able to ‘stretch’ out distributions based on their own entire life expectancy, but now most non-spouse beneficiaries will be required to deplete their accounts within ten years after the original owner’s death. (Unlike RMDs, though, the new 10-Year Rule offers flexibility around the timing of distributions, as it does not require annual withdrawals – funds can be withdrawn in any amount, at any time over the course of the 10-year term – as long as the entire amount is withdrawn by the end of the 10^th year.)

However, not all beneficiaries will be impacted by this new “10-Year Rule”. Instead, the SECURE Act identifies three distinct groups of beneficiaries: Non-Designated Beneficiaries (i.e., non-person entities such as trusts and charities), Eligible Designated Beneficiaries (i.e., individuals who are spouses of account holders, those who have a disability or chronic illness, those not more than 10 years younger than the decedent, minor children of decedents, or “See-Through” trusts), and Non-Eligible Designated Beneficiaries (i.e., any individual who qualifies as a Designated Beneficiary but is not on the list of Eligible Designated Beneficiary).

This distinction matters because Non-Designated Beneficiaries and those who are part of the newly created Eligible Designated Beneficiaries group are generally subject to the same rules prior to the SECURE Act (either the 5-year rule or stretching over life expectancy, respectively), it is the Non-Eligible Designated Beneficiaries that are now subject to the new 10-Year Rule, from trusts to adult children and more. Fortunately, the 10-year rule does still facilitate at least some flexibility – as the rule simply requires that all funds be distributed by the end of the 10^th year after death of the original account owner, but the beneficiary has discretion over when to take the dollars out over that time window – though such a mandatory distribution window may introduce new challenges for certain types of See-Through trusts (where the flexibility eliminates ‘automatic’ annual conduit distributions to beneficiaries and could trigger the sudden liquidation of both the IRA and trust at the end of the 10-year window).

Ultimately, the key point is that, while there are now three distinct groups of beneficiaries under the SECURE Act, only one of these groups (i.e., the Non-Eligible Designated Beneficiaries) must now contend with the new SECURE Act 10-Year Rule for inherited retirement accounts. For the other two groups (i.e., Eligible Designated Beneficiaries and Non-Designated Beneficiaries), very little has changed for Non-Designated Beneficiaries, and Eligible Designated Beneficiaries still follow the same rules (with few exceptions) as the pre-SECURE Act Designated Beneficiaries.

Coordinating QCDs With Post 70 1/2 IRA Contributions Under The SECURE Act

January 22, 2020 07:16 am 8 Comments CATEGORY: Retirement Planning

In December 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was passed into law, making many substantial updates to long-standing retirement account rules. While one rule repealed the maximum age for making Traditional IRA contributions (as now IRA owners beyond age 70 1/2, and in fact of any age, are allowed to contribute to their accounts, as long as they have compensation [generally earned income] to contribute), another such rule was created that, in essence, limits the amount of Qualified Charitable Distributions (QCDs) a Traditional IRA account holder can make, depending on the cumulative amount of those post 70 1/2 deductible contributions claimed.

Qualified Charitable Distributions (QCDs) are tax-efficient methods of making charitable donations with funds from a Traditional IRA (or inherited Traditional IRA). Essentially, an account holder (or beneficiary) age 70 1/2 or older can transfer up to $100,000 each year directly to charity. While the distribution from the account can count toward the account holder’s annual RMD, it is not included as Adjusted Gross Income (AGI), and thus does not need to (and cannot) be included as a charitable gift itemized deduction, making it a ‘perfect’ pre-tax donation.

With the passage of the SECURE Act, however, IRA account owners must now reduce their intended QCDs by any contribution amounts made into their IRAs after age 70 1/2 (the age cap in place to make IRA contributions before passage of the SECURE Act), to the extent they have not already been used to reduce their QCD. In other words, IRA contributions made after age 70 1/2 cannot be turned around to be used as QCDs… and the rules effectively require a “LIFO” treatment that ensures post-age-70 1/2 contributions will first and foremost be used to reduce future QCDs.

Going forward, there are four steps used to calculate allowable QCDs (to account for the potential impact of post-age-70 1/2 contributions):

Determine current-year distributions made and intended to be counted as QCDs;
Calculate total remaining distributions to be denied QCD status (this includes any deductible Traditional IRA contributions made by the account owner after reaching age 70 1/2 minus any QCD amounts disallowed in prior years);
Determine current-year distributions that will be denied QCD status (by identifying the lesser of the amount determined in steps 1 and 2); and
Determine current-year distributions which will be treated as a QCD (by taking the amount from step 1 and subtracting the amount from step 3).

Presumably, this QCD ‘anti-abuse’ provision is meant to prevent individuals from deducting Traditional IRA contributions (above-the-line deductions that reduce a taxpayer’s AGI) and then donating those contributions on a pre-tax basis (as a QCD), particularly in scenarios where they otherwise were not itemizing deductions and could not have otherwise made a pre-tax charitable contribution.

Despite this new provision, though, financial advisors can use numerous strategies to help clients benefit from QCDs. For example, Traditional IRA contributions can be voluntarily removed if done by October 15^th of the year following the year in which the contribution was made. Thus, an account holder who makes a contribution, who then decides they would instead prefer to make a QCD, can withdraw the contribution within the allowable timeframe, preventing any reduction to their QCD. Alternatively, married spouses who each have their own IRA account can choose to use one account to receive post-70 1/2 deductible contributions and the other to make QCDs. A third option would be for account holders to simply ‘burn’ through their post-70 1/2 contributions by making charitable donations from their IRAs that ‘use up’ QCD-disqualifying contributions as quickly as possible. While this means that taxable income will be reported for those account distributions, charitable gifts may be reported as itemized deductions, with future QCDs to be unaffected by these contribution amounts.

Some additional strategies available to advisors and their clients work to avoid the anti-abuse rule altogether. These include using other tax-efficient means to make charitable contributions (such as donating highly appreciated stock in a taxable account, which avoids potential capital gains taxes from selling the stock outright and, for those who itemize, allowing the contribution to be itemized as a charitable donation), contributing to employer-sponsored retirement plans (e.g., 401(k)s, and even SEP IRAs and SIMPLE IRAs) or Roth IRAs instead of Traditional IRAs (since contributions to Traditional IRAs only result in QCDs being denied), and choosing not to claim the deduction on Traditional IRA contributions (even if otherwise available) and deliberately making non-deductible contributions instead (to at least preserve the non-taxable treatment of those contributions for the future).

Ultimately, the key point is that the SECURE Act’s repeal of the age limit cap on Traditional IRA contributions has complicated the coordination of post-70 ½ contributions and QCDs with its introduction of the anti-abuse provision, which reduces allowable future QCDs by the amount of post-70 ½ IRA contributions. However, financial advisors can help their clients continue to make QCDs successfully with a range of planning strategies, some of which work with the anti-abuse provision, and some that avoid it altogether.

How Required Minimum Distribution (RMD) Changes Under The SECURE Act Impact Retirement Accounts

January 8, 2020 07:04 am 23 Comments CATEGORY: Retirement Planning

Last month, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was passed into law, creating the most substantial updates to the laws governing retirement accounts since the Pension Protection Act in 2006. One notable change resulting from the SECURE Act will be the increase in age at which Required Minimum Distributions (RMDs) must begin. Prior to the SECURE Act, individuals with IRA accounts or qualified employer-sponsored retirement plans were required to take RMDs beginning in the year in which they turned 70 ½ with a deadline (for the first RMD only) of April 1 of the following year.

Beginning in 2020, however, the new age at which RMDs must start is age 72 (also with a deadline of April 1 of the following year). Notably, RMDs for individuals who turned 70 1/2 in 2019 are not delayed, and instead, such individuals must continue to take their RMDs under the same rules prior to passage of the SECURE Act. Despite the delay in the starting age for RMDs, though, Qualified Charitable Distributions (QCDs) from IRAs will not be affected by the SECURE Act; accordingly, QCDs may still be taken from IRAs as early as age 70 1/2.

While the same life expectancy factors will continue to be used with no change under the SECURE Act, the IRS has recently (and separately) proposed to update the current life expectancy tables to adjust for longer expected lifespans. The IRS proposal has not yet been finalized, but is largely expected to be effective for RMDs calculated for 2021, and beyond.

Interestingly, for those who were born in the first half of the year (i.e., between January 1^st and June 30^th), the SECURE Act provides a longer delay of the first RMD than for those individuals born on July 1^st or later. Those with birthdates in the first six months of the year reach age 70 and 70 1/2 in the same year (and thus their first RMD is not required until two years later, when they reach age 72), whereas those whose birthdates are in the last six months of the year reach age 70 1/2 in the year they reach age 71 (and thus, their first RMD is ‘only’ delayed until the following year, when they turn 72).

The majority of retirees will not be impacted by the delayed RMD starting age (since most people aren’t able to afford to wait until the age when RMDs must begin), but for those that are, strategically timed Roth Conversions can be an effective tool to accelerate income in a tax-efficient manner, leveraging the additional time that IRA owners are afforded before their RMDs start, thus increasing their annual income.

Ultimately, the key point is that, while the change in RMD starting age won’t impact a large swath of the population, financial advisors are likely to have clients who will be affected by the change and who may benefit from the additional time in which Roth Conversions can be executed. Furthermore, advisors should also review their technology systems and planning processes, specifically for clients born after June 30, 1949 and who will be affected by the new RMD rules.

SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges

December 23, 2019 07:35 am 129 Comments CATEGORY: Retirement Planning

Sweeping legislative tax or retirement reforms typically happen only once every decade or so, but the final weeks of 2019 brought the second major piece of Congressional action in the past 24 months, as the SECURE Act (along with a series of year-end tax extenders), which was passed in the House this past summer, finally made its way through the Senate and was signed into law by the President. The legislation will have substantive repercussions as financial advisors help clients plan for their retirements for years to come.

In the context of financial advisors and the clients they serve, the first, and probably most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. On the one hand, without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of “see-through” trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they’re no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).

Other notable retirement planning changes under the SECURE Act include lifting the restriction on making contributions to a traditional IRA after age 70 ½ (as long as there is earned income to contribute in the first place), and an age increase for the onset of RMDs from age 70 ½ to age 72. However, as was the case with the IRS’s recent proposal to update the RMD life-expectancy tables, since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires. In addition, the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70 ½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).

Beyond the changing or elimination of various age-based thresholds for retirement accounts, the SECURE Act also includes an allowance for a penalty-free distribution up to $5,000 for a qualified birth or adoption, the creation of a Fiduciary Safe Harbor for selecting a “Lifetime Income Provider” (i.e., annuity company) for ERISA fiduciaries (thus assuaging at least some liability concerns around using lifetime income annuities in qualified plans), a substantial increase in the tax credit available to small businesses when establishing a retirement plan (as well as a brand new tax credit for small businesses that adopt an “auto-enroll” provision in their retirement plans), an increase in the allowable auto-enrollment “default” 401(k) plan contribution, improved access to employer plans for long-term part-time workers, and a significant reduction in the barriers to creating and maintaining Multiple Employer Retirement plans (which in theory will help to create economies of scale for lower plan costs when a group of small employers band together to provide a retirement plan)… as well as several other miscellaneous, smaller retirement provision changes.

Other notable non-retirement provisions attached to the SECURE Act include a repeal of the TCJA-introduced Kiddie Tax changes (reverting away from a requirement to use trust tax brackets and back to using the parents’ top marginal tax bracket), adjustments to the medical expense deduction threshold (back to 7.5%-of-AGI again for 2019 and 2020!), expanded provisions for 529 college savings plans to be used for Apprenticeships and (up-to-$10,000 of) student loan repayments, and a series of Tax Extenders for the mortgage insurance premium deduction and the higher education tuition and fees deduction.

Ultimately, the key point is that, although not nearly as sweeping as the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 makes numerous updates to the rules around retirement plans in an effort to increase access to employer-sponsored retirement plans, and (hopefully) takes a positive step towards addressing the so-called retirement crisis. But as with other legislation in recent years, what legislation may give with one hand, it takes with the other, and in practice, many financial advisors may spend more time dealing with what is lost under the SECURE Act – in particular, the stretch IRA – than what is gained. At the very least, though, financial advisors will be busy in months ahead as they re-evaluate plans for clients impacted by the new and updated provisions introduced by the SECURE Act.

2024 Election: Evaluating The Impact Of A (Likely) Republican Trifecta On The TCJA Sunset And Tax Planning

November 13, 2024 07:02 am 0 Comments CATEGORY: Taxes

With Republicans appearing to have secured a sweep of the White House and both chambers of Congress, the most immediate question for many financial advisors and their clients is what impact the election results will have on the scheduled expiration of the Tax Cuts & Jobs Act (TCJA) at the end of 2025.

At a high level, the Republican trifecta would appear to set the stage for much of TCJA to be extended beyond the original 2025 sunset date. However, with the makeup and priorities of the incoming Congress differing from those in 2017 – and with President-elect Trump having made numerous promises for new tax cuts on the 2024 campaign trail – there will inevitably be portions of the existing law that Congress will aim to amend or even expand beyond the original tax cuts created by TCJA. Which means that the question going forward is not so much whether TCJA will be extended, but rather which portions will remain in their current form and which may have some 'wiggle room' for change in the next tax bill.

For example, the current 7 tax brackets and increased standard deduction that have been in effect since 2018 are expected to remain largely unchanged. However, the $10,000 limit on State And Local Tax (SALT) deductions, which has been highly contentious with both Democrat and Republican supporters and detractors, is much more likely to become a negotiating point. Some legislators advocate keeping the SALT cap as is, others push for it to be raised in some form, and still others (including the president-elect) want the SALT cap to be eliminated entirely.

Other key areas likely to be impacted include:

The Child Tax Credit, which is currently capped at $2,000 per child, with some bipartisan support to raise it at least to the pandemic-era $3,600 maximum;
The Alternative Minimum Tax (AMT), which currently affects very few taxpayers, could be amended as part of SALT cap negotiations to kick in at lower income levels for households with high SALT deductions, offsetting the impact of raising or eliminating the SALT deduction cap;
The Section 199A deduction for Qualified Business Income (QBI) for pass-through owners, which could conceivably be increased if Congress pursues Trump's proposal to cut corporate tax rates from 21% to 15% in order to preserve the proportionate difference between pass-through and corporate tax rates;
The gift and estate tax exemption, which appears likely to remain at its current elevated level, reducing the urgency for high-net-worth households to gift assets or implement trust strategies to reduce their taxable estate before 2026 (and, in some cases, making it better to avoid gifting assets to preserve the step-up in basis those assets would receive otherwise).

Furthermore, the Trump campaign has proposed a number of additional tax cuts, including tax-free treatment of income from tips, overtime pay, and Social Security benefits, and even eliminating income tax entirely in favor of tariffs. Notably, though, any of these proposals would still need approval from a Congress that may prefer to extend existing tax cuts rather than introduce new ones.

What's certain heading into 2025, however, is that there will be a new tax bill to extend and/or replace TCJA. And while it may not represent as large of a shift from the status quo as TCJA did in 2017, it could still have tax planning implications for millions of Americans – at least until it reaches its own sunset date in another 8–10 years!

Values, Purpose, Action: A 3-Part Approach To Establish A “Statement Of Financial Purpose” And Unlock Deeper, More Meaningful Planning Conversations With Clients

November 6, 2024 07:01 am 0 Comments CATEGORY: Client Trust & Communication

In the early days of financial planning, serving clients often meant developing transactional relationships focused on facilitating trades and selling insurance. Over time, advisors shifted toward more analytical approaches, such as investment management and retirement planning. Today, the industry has evolved further, with a growing emphasis on aligning financial decisions with clients' personal priorities and life goals. While this shift from numbers-based strategies to a more holistic, values-driven framework has opened the door to deeper, more meaningful conversations, it also presents a challenge for clients who may struggle to define their values or articulate a sense of purpose.

In this article, Jeremy Walter, founder of Fident Financial, and Andy Baxley, founder of Two Trails Financial Planning, discuss how advisors can follow a 3-part framework to help clients craft an informative, values-based statement of financial purpose.

The process begins by helping clients define their core values. This can involve asking reflective questions, such as "What does a perfect day look like to you?" or "How do you define success, security, and a life well-lived?" These questions encourage clients to uncover important themes – such as business growth, building a legacy, or prioritizing simplicity and family time – that guide their decisions. Typically, these values fall into 2 categories: realized values, which are already present in a client's life, and aspirational values, which represent qualities they want to embody. Advisors can then ask follow-up questions to further explore and deepen these themes, helping clients gain even greater clarity.

Once the client's values have been established, the next step is to articulate a statement of financial purpose – a concise expression that captures the "why" behind the client's financial decisions. This statement should go beyond superficial goals or what the client believes they should say, instead reflecting their true, deeply held priorities. Advisors play a crucial role here by helping clients draft, refine, and finalize a statement that feels authentic and actionable. This statement of financial purpose serves as an anchor for the client, providing clarity and direction as they make future financial decisions.

After the statement of financial purpose is created, the focus shifts to taking action. Advisors can help clients use their statement as a guide for assessing financial goals – both existing and future ones. Clients can reflect on whether their current goals are helping them get closer to living out their values or whether they need to revise their plan to better reflect what truly matters. The statement can also be used to establish new goals, ranging from more immediate, short-term objectives to larger, more ambitious stretch goals that, while challenging, may ultimately be more fulfilling. As clients begin to articulate and live by their values, advisors can revisit the statement periodically to ensure it remains relevant and aligned with evolving goals, and to assess whether adjustments are needed to better reflect their client's reality.

Ultimately, the key point is that understanding a client's values and purpose can unlock deeper, more meaningful financial planning conversations, enabling more fulfilling client discussions and allowing clients to do more with their money. And by aligning financial decisions with a clear statement of purpose, clients can foster a more intentional and meaningful relationship with their wealth!