Making the CARES Act and The SECURE Act Work together for Large Retirement Accounts

The COVID-19 pandemic and passage of the CARES Act has taken attention from the provisions of The SECURE Act, which was legislation passed in December 2019 aimed at modernizing the current retirement system. If you haven’t reviewed your overall retirement account strategy in the past several months, you could be missing out on money-saving opportunities and/or setting your beneficiaries up for an unexpected tax bill down the road.

The SECURE Act eliminated the opportunity for IRA’s to stretch over the course of a non-spouse beneficiary’s lifetime. As an example, a child inheriting a parent’s retirement account after December 31, 2019 will have only 10 years to take the money out and pay taxes on those funds. Since tax rates are relatively low today, there is a good chance those funds will be taxed at higher rates in the future. If your portfolio has experienced declines during this time and/or your income is reduced, you may want to consider converting all or part of your traditional IRA to a ROTH IRA. Presumably, the taxes would be paid from taxable funds at today’s low rates and would preserve the funds tax free for future generations. ROTH IRA’s have no required minimum distribution requirements and these accounts grow tax-free. The success of this strategy depends on the age of the account owner, income, liquidity, and overall estate planning goals.

Another consideration would be to make a charitable organization the beneficiary of all or a part of a retirement account, particularly if the estate is large enough to be subject to estate taxes. If there is concern about taking money from family members, there are strategies to address that issue that are more complex and should be considered on an individual basis.

The SECURE Act changed the date when required minimum distributions (RMD) from age 70 ½ to age 72. So, if you turn age 70 ½ in February 2020, you have until April 1, 2022 to begin taking those distributions. HOWEVER, the rules regarding Qualified Charitable Distributions have not changed. You may still make up to $100,000 of distributions from an IRA directly to a qualifying charity as early as age 70 ½ and NOT have that distribution be reported as income. Donating to charity in this fashion provides the ability to lower adjusted gross income, which is more valuable than reporting the income, then taking an itemized deduction, as this approach merely loweres taxable income. The CARES Act has lifted income limitations on the tax deductibility of cash contributions to qualified charities from 60% of adjusted gross income to 100% for the tax year 2020. If you are reaching age 70 ½ in 2020 and are charitably inclined, this would be a good year to make a large charitable contribution or “front load” contributions intended to be made in future years. Note that donations to donor-advised funds are not given this preferred tax treatment.

For those with large retirement accounts that will likely be passed to the next generation, we recommend a conversation with those beneficiaries regarding their own retirement account strategy. It would be wise for the younger generation to consider directing their own retirement savings to a ROTH 401k or 403B, which are widely available, or a ROTH IRA, if they qualify. Estate and tax planning works best when it is multi-generational.