The Setting Every Community Up for Retirement Enhancement (SECURE) Act’s new 10-year maximum post-death payout period for qualified retirement plan accounts and individual retirement accounts (retirement accounts), except in the case of a surviving spouse and certain other beneficiaries, should prompt estate-planning attorneys, CPAs, trustees and financial advisors to mark their estate planning files to be sure these 10-year beneficiaries get the proper tax advice after the participant/owner passes. The client should also flag his estate-planning file with a bold notation for the beneficiaries to seek the advice of a competent tax advisor prior to making any decisions regarding the withdrawal of retirement account funds after the participant/owner’s passing.
Assume, for example, that the participant/owner dies when his three children range in age from 55 to 63. Under this common scenario, how should the children be advised if they would like to minimize the otherwise harsh effects of the SECURE Act? The key factor will be tax brackets.
Years From Retirement
Assume, for example, that the 63-year-old tells you that she’s two years from retirement. Very likely, then, it will be wise for this child to defer taking any distribution for two years, and then take one-eighth a year.
On the other hand, assume the 55-year-old tells you he’s “about 10 years” from retirement. Very likely, it will make sense for this individual to spread the retirement account proceeds equally over the 10-year period.
If an adult child isn’t yet on Social Security and/or Medicare, it may make sense to accelerate the payments so that a lesser amount of that child’s future Social Security payments will be taxed (including, in some states, for state income tax purposes), and/or her future Part B Medicare premiums will be less. Bear in mind, however, that for Medicare Part B purposes, there’s a two-year lag in the reported income figures that the government uses for these computations.
If an adult child has children of his own who may be in their early working years (and not subject to the so-called Kiddie Tax), it may make sense for the adult child to disclaim all or a portion of the retirement account proceeds, so that they’ll be spread among more taxpayers—taxpayers who are likely to be in lower income tax brackets than the adult child who would otherwise receive the proceeds.
Examine the Options
The postmortem planning point eventually becomes self-evident: With the advent of the new, accelerated retirement account post-death distribution rules, beneficiaries need to shrewdly examine all of their options for withdrawing the retirement account proceeds, to minimize the family’s overall income tax liability.