*February 2020 Articles*

Significant changes to retirement accounts, including taxes on inherited accounts

Falco & Associates, P.C.

The Setting Every Community Up For Retirement Enhancement (SECURE) Act

On December 20, 2019, the SECURE Act was signed into law. The SECURE Act contains 29 provisions, encompassing many aspects of financial planning and retirement saving. Once treasury regulations are released, nuances in interpreting this new law will become clearer. Until then, individuals are left to interpret the law’s effects based on the language of the law itself. This article will address what the SECURE Act entails and who it affects, as well as provide suggestions on how to plan for the changes that have been instituted.

Key Provisions of the SECURE Act

• Repeal the prohibition of retirement contributions after the account owner reaches age 70½.
• Delay the age for required minimum distributions (RMDs) from 70½ to 72.
• Eliminate the lifetime “stretch” IRA option, requiring nonspouse beneficiaries of IRAs to deplete the inherited balance within 10 years of the decedent’s death (with exceptions; see below for more details).
• Permit penalty-free withdrawals of up to $5,000 from retirement accounts to help pay for childbirth or adoption expenses.
• Expand permitted expenses for 529 college savings plans to include apprenticeships, as well as up to $10,000 of qualified student loan repayments for the beneficiary and $10,000 for each of the beneficiary’s siblings (an aggregate lifetime limit, not an annual limit).
• Reinstate the “kiddie tax” to pre-Tax Cuts and Jobs Act rates. (Excess income will be taxed at the parents’ rate rather than the trust and estate rates.)
• Allow graduate students to count stipends and nontuition fellowship payments as compensation for IRA contribution purposes.

Many of the provisions adopted into the Internal Revenue Code as part of the SECURE Act allow individuals more time for tax-deferred savings and growth before distributions are required. The provisions deemed advantageous to individuals and businesses may result in less tax revenue to the government, however. So, the SECURE Act also includes requirements designed to account for this loss of revenue by accelerating the withdrawal and taxation of inherited retirement accounts.

Planning for the Loss of the “Stretch” IRA Option

Although there are many ways in which the SECURE Act will change how individuals save for retirement, the provision with the greatest effect is the elimination of the lifetime “stretch” option for IRAs. Prior to the SECURE Act, individual beneficiaries were entitled to stretch out the withdrawal of their inherited retirement account in accordance with their life expectancy. Now, beneficiaries are required to withdraw their entire inherited retirement account within 10 years of the original owner’s death.

There are some exceptions to this rule, however. The individuals who remain entitled to the lifetime “stretch” option include:

• The surviving spouse of the employee
• A child of the employee who has not reached the age of majority (account would need to be distributed within 10 years of reaching the age of majority)
• Disabled individuals
• A chronically ill individual
• An individual who is not more than 10 years younger than the employee

In most instances, withdrawal of a beneficiary’s retirement account over a 10-year period (rather than over the course of his or her lifetime) will result in substantially less tax-deferred growth, as well as more taxes due on withdrawal from the account. To help mitigate the potential negative ramifications of these changes, below are a few strategies to consider when planning for the loss of the beneficiary “stretch” IRA option.

Roth conversions. With tax rates at historic lows and uncertainty surrounding their future, it could be a good year to coordinate with a CPA to potentially accelerate Roth conversions, so that beneficiaries may avoid being taxed rapidly on distributions. This is an especially applicable strategy if the beneficiaries are in a higher tax bracket than the account owner.

Alternatively, individuals with legacy priorities may not be motivated to accelerate Roth conversions under the SECURE Act because a grandchild (for example) will not receive the long period of tax-free growth from the inherited Roth.

Going forward, account owners should be sure to ask these key questions before making a Roth conversion:

• Will the individual need the money within five years of conversion?
• Will the individual be in a higher or lower tax bracket in the future? Are the beneficiaries expected to be in a higher tax bracket?
• Where will the individual get the money from to pay the taxes owed because of the conversion?

Charitable remainder trusts (CRTs). An account owner could consider naming a CRT as the beneficiary of an IRA. These trusts are structured so that a beneficiary would collect a stream of income from the assets of the CRT for a specified time. At the end of that period, the charity would collect whatever is left. The CRT isn’t taxed on the distribution from the IRA or the income it earns; however, the beneficiary will be responsible for any taxes owed on distributions from the CRT.

Life insurance. Individuals may want to explore whether taking a withdrawal from the retirement account to pay premiums on a life insurance policy is more advantageous than leaving the retirement account to the beneficiaries. Beneficiaries typically receive life insurance money tax free. Depending on the insurability of the individual, the total death benefit payable to the beneficiaries may exceed what they receive as beneficiary of an IRA. This analysis should be performed by a qualified financial professional.

Qualified charitable distribution (QCD). If an individual is older than 70½, he or she is entitled to make tax-free gifts of up to $100,000 per year from their IRA payable directly to charity. QCDs may become more advantageous after the SECURE Act because IRAs will become a less attractive inherited asset. Therefore, tax-free depletion of the IRA may be more beneficial than the dissipation of other nonqualified appreciated assets, which could pass to beneficiaries at a stepped-up basis.

Account owners will need to coordinate with their CPA if they are planning to contribute to their IRA after age 70½, as such contributions may affect the QCD treatment.

Trusts. The SECURE Act decreases the amount of complexity and risk involved in naming a trust as a beneficiary. The cost-benefit analysis of tax deferral versus control of distributions will shift, as the stretch would be no more than 10 years.

It is imperative that individuals who named a trust as the beneficiary of an IRA prior to the implementation of the SECURE Act review their current estate plan with an attorney to determine how the SECURE Act may affect the distributions from the IRA to the trust. In some instances, trusts drafted prior to the SECURE Act may be obsolete, resulting in a distribution pattern that works against the original intent of the trust.

Estate planning. It may make sense for account owners to revise their estate plan to take a more comprehensive “asset-by-asset” approach, rather than to continue splitting assets by percentage. For example, the account owner might earmark IRA assets to be distributed to minors or individuals in lower tax brackets and designate a larger proportion of non-retirement assets to those with higher incomes.

Who Is Not Affected by the SECURE Act?
This new legislation will not affect the following individuals:

• Those who turned 70½ prior to December 31, 2019 (Individuals who were 70½ or older as of December 31, 2019, will continue with RMDs under the pre-SECURE Act rules.)
• Surviving spouses of IRA owners
• Beneficiaries of IRA owners who died before December 31, 2019
• Beneficiaries of some owners of existing qualified annuities

Secure Your Future

As more information becomes available regarding the interpretation of the SECURE Act, it’s important to continue to review all aspects of your financial plan and beneficiary elections to ensure that you understand how you and your family have been affected. Be sure to reach out to your tax professional or contact our office for help navigating your situation.

By: Joshua Grieves


Joshua M. Grieves is a financial professional with BostonPremier Wealth, LLC. at 51 Mill Street, Suite 1, Hanover, MA 02339. He offers securities as a Registered Representative of Commonwealth Financial Network®, Member FINRA/SIPC. He can be reached at 617-934-1096 or at jgrieves@bpwealthllc.com.

Falco & Associates, P.C.

No Pension Or Retirement Savings?
How To Get By On Social Security

  1. Getting by on Social Security - Most people heading into retirement aren't worried about what to do with all that free time — instead, they're wondering how they'll afford it. According to the Social Security Administration, about 21% of married couples and 43% of single seniors rely on Social Security for more than 90% of their income. Unfortunately, the benefits typically replace only about 40% of pre-retirement earnings. Cheapism asked finance experts across the country for tips to help make ends meet on Social Security alone.
  2. Delay Retirement - If Social Security is likely to be your sole source of income during retirement, then begin by making sure you're doing everything possible to maximize that benefit, said David Bakke of Money Crashers. "This might involve working longer than expected, especially if you're earning good money later on in life." Normal retirement age is 67. It's possible to take Social Security benefits at 62, but the amount you receive will be greatly reduced if you draw your benefits early. Bakke's recommendation: trying to work until the age of 70 before taking benefits, which will result in a boost in the amount you ultimately receive each month.
  3. Ask Key Questions - As your retirement date draws closer, call the Social Security Administration to obtain specific details regarding your expected monthly payment so that you're prepared. But perhaps more important, ask specific questions, said Dawn-Marie Joseph, founder of Estate Planning & Preservation. For instance, "you might not know that you may be able to collect your deceased or ex-spouse's monthly Social Security payment, which could ultimately be more than what your benefit would be," she said.
  4. Reduce Expenses - If your only source of income during retirement is Social Security, another important step is reviewing and minimizing expenses. "Start with the highest-impact expenses, such as home and car costs, then move down the list," said Dustyn Ferguson, creator of DimeWillTell. "By focusing on high-impact expenses first, you can see the real impact these expenses have on your retirement budget."
  5. Research Benefits - There are more than 2,500 benefit programs nationwide designed to help lower-income seniors with expenses related to housing, medication, healthcare, and taxes, said Drew Kellerman of Phase 2 Wealth Advisors. The National Council on Aging has created a nonprofit website, BenefitsCheckUp, to help retirees find these programs.
  6. Downsize - Seniors between age 65 and 74 spend about 32% of their household income on housing annually. Consider getting a roommate who can share the bills, or sell your house and move to a smaller place. "Not only will you see money back in your wallet by downsizing, but it also opens the choice of moving to a place that has lower costs of living," said Ferguson, of DimeWillTell.
  7. Relocate - Moving to a place with a lower cost of living is one of the most comprehensive ways to stretch your dollar, said Kellerman, of Phase 2 Wealth Advisors. "According to the Bureau of Labor Statistics, the annual cost of living in Birmingham, Alabama, is $33,219, and the average price of a home in that city [in 2018] is $65,100, or about the same as a 10% down payment on the average single-family dwelling in parts of Seattle."
  8. Sell Your Car - There are many expenses associated with owning a car, among them maintenance, gas, and car insurance. "Car insurance isn't worth the cost if the car isn't being used much," said Ferguson, of DimeWillTell. "Getting rid of the car entirely and using ride-sharing services can actually be a big money saver."
  9. Eliminate Debt - If you're approaching retirement age with a mountain of credit card debt, make it a priority to eliminate those balances. "Get on a budget, reduce expenses, and send any financial surplus to your credit card balances," said Bakke, of Money Crashers.
  10. Tap Your Equity - Many retirees who own their homes outright are using the equity in their properties to get by, via reverse mortgages. "For the right person, this option can allow them to 'cash out' some of their home equity while staying in their home for the rest of their life," said Kellerman, of Phase 2 Wealth Advisors.
  11. Utilize Community Programs - Food pantries and other donation centers can be a lifesaver when living on a fixed income. And don't overlook places like Salvation Army, Goodwill, and other secondhand stores.
  12. Sign Up for Medicare - As soon as you're eligible, be sure to sign up for Medicare, the federal health insurance program for people 65 and over. This will help reduce your out-of-pocket health insurance costs. There are various Medicare programs covering hospital stays, doctor visits, and prescriptions.
  13. Use Medicaid - Medicare doesn't pay for all medical expenses. If you're among those relying primarily on Social Security to get by, Medicaid may be able to help. It's aimed at low-income people, families and children, pregnant women, the elderly, and people with disabilities. It can pay for things that Medicare does not cover, even such critical expenses as long-term care.
  14. Ask for Senior Discounts - Get into the habit of inquiring about senior discounts wherever you go. You may be surprised by how many places offer them. Joining AARP once you turn 50 provides access to discounts on rental cars, hotel rooms, and train and bus fares. Among the countless stores that offer discounts, Kohl's provides a 15% senior discount every Wednesday. Many airlines, including British Airways and United, also offer reduced prices for older travelers.
  15. Consider a Group Home - Yet another approach to trimming living expenses may be to find a group home, said Dock David Treece, a senior financial analyst with FitSmallBusiness. "By moving in with other adults, you can significantly lower your cost of living, which will help you survive on Social Security."
  16. Increase Your Deductibles - One approach to lowering your recurring monthly bills is to increase the deductible on your health insurance. Higher deductibles typically translate into lower monthly premiums. This approach may not be for those making frequent visits to the doctor or other health professionals, however.
  17. Cut Entertainment Costs - Make the most of your entertainment budget by planning around discounts. AMC Theatres offer a senior discount ticket for those 60 and older. Cinemark theaters host Senior Days that include discounted tickets. Ticketmaster also offers exclusive discounts to AARP members, such as two-for-one tickets to concerts and more.
  18. Reduce Utility Costs - In some cities and states, utility companies offer discount programs for senior citizens. In Georgia, seniors can receive a discount on gas and electric bills. The city of Seattle also offers eligible customers a 60% discount on their Seattle City Light bill and a 50% discount on their Seattle Public Utilities bill. The program is available for income-qualified residential households. Be sure to ask your utility provider about similar programs.
  19. Switch Your Phone Service - Some wireless phone providers also offer discounted plans for seniors. T-Mobile's Magenta program provides customers who are 55 and older with two lines for just $28 per line with AutoPay. Sprint offers a similar program. Consumer Cellular offers AARP members a 5% discount on monthly fees and usage charges and a 30% discount on select accessories.
  20. Earn Extra Income - If budget cuts aren't enough, find a source of additional income. There are many ways to do this, from a part-time job to a hobby that provides income. "It's the last thing many people in retirement want to do, but not all sources of income have to be labor-intensive or take a lot of time," said Ferguson, of DimeWillTell. "Passive income sources are a huge win for people in retirement, as they don't take up much time and can really make an impact in your income."
  21. Don't Earn Too Much - While bringing in some additional money can be helpful, do your research first. Working while claiming Social Security benefits can result in your benefits being reduced if you pass certain thresholds, Ferguson said. "You'll need to balance the math out just right to prevent working from costing you, rather than helping you."
  22. Move in With Family - One of the most popular choices for seniors who retire without a pension or other funds is to move in with their children, said Treece, of FitSmallBusiness. "This isn't an option for all retired seniors, but if you have adult children who live in your area and are willing to take you in, this is usually a cost-efficient option."
  23. Consider Retiring Abroad - For more adventurous retirees, relocating abroad is yet another option that can help stretch a budget. "Many retirees who would barely get by on their modest income here in the U.S.A. have found that they can live at least a middle-class lifestyle on Social Security alone depending on where they choose to live," said Kellerman, of Phase 2 Wealth Advisors, who suggested conducting thorough research and taking "test trips" before making the big move.
  24. Stop Benefits - If you began tapping Social Security benefits early and regret that decision, all may not be lost. It's possible to withdraw your application for up to 12 months after beginning benefits. While this option requires repaying all the money already received, it allows something of a reset. You can continue growing your benefits until you want to file again.
  25. Suspend Payments - Even after the 12-month mark has been eclipsed, there's still one last way to slightly increase your Social Security benefits: When you turn 66, it's possible to suspend the monthly payments, this time without having to pay the money back. For each year your payments are suspended up until age 70, you get retirement credit that increases your benefits by 8% each year.

By: Mia Taylor, msn.com

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