More Strategies for Dealing with the Secure Act’s 10-Year Rule

By Chris Chapman, CTFA & Trust Administrator

With appreciation to colleagues Jeanne Gilbert and Deb Brown for their assistance
My colleague Jenny Rowe explains how to deal with IRA money that will be held in trust for your beneficiaries. There is a second, complementing set of planning techniques available that can be brought to bear during lifetime to minimize the size of the IRA itself without much loss of benefit.

Spend down from the IRA during your lifetime while keeping an eye on your tax bracket. The idea may scrape against your saving and financial discipline, but by using some of that money instead of your trust’s tax-free principal, you will proportionately reduce the impact of the eventual tax issues associated with the Secure Act’s ten-year-termination rule. That tactic will also leave more of your principal available for the support of your trust’s beneficiaries – with corresponding tax savings to them.

Convert a portion of your IRA to a Roth IRA. You may already be aware that in most cases, money accumulated in a Roth IRA is not subject to income tax upon distributions.

A caveat, however, is that rolling over IRA money to a Roth IRA is a taxable event, so you would lose some money to taxes in the transaction. Also, this technique is best used when you have plenty of time to make up the loss to taxes with growth and income from the IRA, the Roth IRA, or other investments. For that reason, it may not be good for a person in retirement. For a younger person, though, it may be an excellent strategy.

Make a “QCD” – If you are age 70½ or older, you may want to conduct some, or all, of your charitable giving from your IRA. Tax rules allow such an account holder to distribute up to $100,000 per year to charities. This kind of gift is known as a Qualified Charitable Distribution, or QCD for short. It is important to note that charitable giving strategies are recommended only for those who are charitably inclined in the first place. It should go without saying that there is actually no money saved for the family when it is given away. But charitable use of IRA funds can indeed simplify your income tax situation.

Involve a certain kind of charitable trust. A more sophisticated way to simplify administration of your trust and reduce – or even eliminate – the matter of ten-year-rule complexity is to make distributions from your IRA to a trust known as a charitable remainder unitrust during your lifetime, or to make such a trust your IRA’s designated beneficiary – or do both.

Space limitation prevents an in-depth discussion here, but suffice it to say that this vehicle can be handy for the charitably inclined. Upon funding, which is partially deductible, this trust makes distributions each year at a rate you determine to one or more individuals whom you name up front, for life, and then distributes to any one or more 501(c)(3) organizations you also name. The IRA’s accumulated tax-deferred income is thus distributed over the individual beneficiaries’ lifetimes. These distributions completely skirt the Secure Act’s ten-year rule potential tax problem.
Please call us with any questions you may have about these strategies.