Following the enactment of the SECURE Act, individuals and families may want to take a look at retirement account planning alternatives that could provide benefits such as tax efficiency.
1. Qualified Charitable Distributions (QCDs) can provide tax efficiency for seniors.
Making QCDs can provide a tax benefit for seniors, even those who no longer itemize deductions like charitable donations because of the current high standard deductions.
A QCD is a distribution from your traditional IRA account which is made directly to an eligible charity. This distribution counts toward satisfying your required minimum distribution (RMD) for the year, but because it is made to the charity and not to you, a QCD does not count in your taxable income like the RMD would. Distributing part or all of your RMD as a QCD instead can help those who are required to take annual RMDs to keep their taxable income and Adjusted Gross Income (AGI) under certain thresholds.
Using your IRA assets for charitable donations makes tax sense, and QCDs can begin at age 70 1/2, even though under the SECURE Act you are not required to begin taking RMDs until age 72. (Remember that making QCDs from Roth IRAs provides no real tax benefits as Roth distributions are usually already tax-free.) Also, any post-70 ½ contributions to an IRA will reduce your QCD in whatever year it is made.
2. Naming a charity as beneficiary of your IRA offers multiple benefits.
Making QCDs is a great tax strategy during your lifetime, but it does not solve the tax acceleration problem that will arise after your death—assets still left in your IRA will have to be distributed out to your beneficiaries (except those exempt under the new rules) within 10 years.
Naming an eligible charity as the beneficiary of all or part of your traditional IRA can help with this issue and provides other benefits. It removes assets from your taxable estate and meets your charitable goals at the same time. Plus, it keeps your beneficiaries from having unfettered access to your IRA assets and protects them from the tax ramifications related to large distributions from your IRA over the shortened 10-year distribution period.
3. Designating IRA assets to a disabled beneficiary allows them to take lifetime distributions.
See Catherine Jacobs’s article, “Planning for Disabled Beneficiaries under the SECURE Act” for a discussion of the benefits and pitfalls associated with this option.
4. Increase the amount contributed to Roth IRAs or convert a traditional IRA to a Roth account.
Taxes have already been paid on Roth assets, eliminating the federal tax repercussions of the 10-year rule on your beneficiaries. See Beth O’Laughlin’s article, “Should I Convert My IRA to a Roth IRA” for information on this option.
5. Splitting an IRA that would otherwise pass to a spouse.
For spouses with individual IRAs, it may make sense for each spouse to name a non-spouse beneficiary (such as a child) for a portion of or for all of the IRA (assuming the surviving spouse will not need the funds) so that the beneficiary receives the benefit of two different 10-year payout periods for IRA funds, one following each spouse’s death, rather than having to take a larger payout of the combined funds over 10 years at the death of the second spouse.
6. For those charitably inclined, creating charitable remainder trusts (CRTs) can mimic the lifetime distribution stretch.
Creating a CRT and naming it as the beneficiary of your traditional IRA controls beneficiary access to IRA funds and provides tax-efficiency under the SECURE Act.
Following your death, the trust will receive and reinvest the IRA proceeds without generating taxable income. Annually the trust will distribute either a fixed amount or a percentage of its value to those you designate, based on their life expectancies (if they are older) or for a fixed term of years if they are younger (up to 20 years). After the trust term is up, the charity receives the remainder of the assets tax-free. Although payment to a CRT generally extends the period over which distributions are made to a beneficiary, these distributions remain subject to ordinary income taxes, and lifetime beneficiaries have no ability to receive any more than the dollar or percentage stated in the trust.
A good time to think about planning options
The new rules from the SECURE Act provide an incentive to think about the planning options available to you for your retirement assets. Your attorney can answer questions and help you determine the options that provide the best outcome for these assets.