The end of 2019 brought big changes to the world of retirement savings. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts a popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans by limiting stretch RMD’s on inherited IRAs.
The changes brought on by the SECURE Act will impact almost anyone who has a retirement account (whether IRA, Roth IRA, 401(k) at work, etc.) These changes have been a popular discussion topic in our client review meetings since the start of 2020. In order to help keep you in the loop, here is a list of some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.
Under previous law, non-spouse beneficiaries who inherited assets in employer plans and IRAs could "stretch" RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year "clock" will begin when a child reaches the age of majority (18 in most states).
This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.
In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.
As you can see, the new SECURE Act may have a big impact on your finances and overall financial plan. This is especially true for current retirees. As a result of these changes, it may be a good time to review your plan. The retirement rules have dramatically changed. If we can be of help in any way please let us know.
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