retirement

How to Leave a Legacy After the SECURE Act

With the death of "stretch IRAs" comes a new era of estate planning. Many people's plans need some serious tweaks.

The SECURE Act is the most significant legislative action impacting our retirement system in more than 10 years. It affects everything from the withdrawals we’re required to take from our retirement accounts to the way we pass down our wealth to the next generation.

Here are a few of the biggest changes:

  • More part-time workers will now have access to a 401(k) plan.
  • New parents younger than 59½ can now withdraw up to $5,000 from retirement accounts for birth or adoption expenses without paying a 10% early withdrawal penalty.
  • Contributions to your traditional IRA can be made at any age if you’re still working (the window for contributions used to close at age 70½).
  • The age for taking your required minimum distributions (or RMDs) rose from 70½ to 72. (For more specifics, read RMDs: When Do I Have to Take One?)
  • Those who inherit a retirement account, like an IRA, and are not the account owner’s spouse will be required to withdraw all the money within 10 years. (Some exceptions: the chronically ill, disabled or minor heirs, as well as heirs who are less than 10 years younger than the decedent.)

Perhaps the most notable change listed above is the end of the “stretch IRA.” In the past, an IRA beneficiary who was not the owner’s spouse could stretch out RMDs over his or her own life expectancy. This helped minimize the heir’s tax bill and allowed money to stay in the account longer and grow tax deferred.

The SECURE Act now requires non-spouse heirs to withdraw all money from the inherited IRA within 10 years following the owner’s death. By taking larger withdrawals from the account over a shorter period of time, non-spouse heirs will face a much bigger tax bill; the money they inherit, combined with their own earned income, could bump them into a higher tax bracket.

Stretch IRAs Are Out; Roth IRAs Are In

With the stretch IRA gone, the Roth IRA is taking center stage. Because the age to take your first RMD has been pushed to 72, you have more time to convert your money to a Roth IRA. Although the elimination of the stretch IRA also applies to Roths, money can be withdrawn tax-free and you can pass your wealth to your heirs tax-free.

Here’s how a Roth conversion might work for you: If you are leaving a $1 million IRA to your two children, the taxes they will pay on that money over the following 10 years could make the IRS your biggest beneficiary. To help avoid that, with proper planning you can take advantage of lower tax brackets as you start converting your traditional IRA to a Roth. First, get your earned income as low as possible. If you are able to delay Social Security until age 70 and avoid tapping into your traditional IRA, you'll have little income to claim on your taxes. This is when it’s best to make conversions. Taxes will be owed on the money that is converted, but depending on your situation, it could lead to lower taxes over your and your heirs’ lifetime.

Review Trust Language

This new retirement law also impacts anyone who has a trust listed as a beneficiary of an IRA or 401(k). Prior to the SECURE Act, many people utilized a “see-through trust” to allow each beneficiary to stretch out the IRA payments over their individual lifetimes, rather than using the oldest beneficiary’s lifetime for the RMD calculations. Because the SECURE Act states that all money must be taken out within 10 years following the owner’s death, it’s important to review your trust’s language with your financial adviser and estate planning attorney to see if your trust still aligns with your intended goals.

This is a good time to sit down with your tax professional, estate planning attorney and financial adviser to determine how the SECURE Act will impact your retirement plan and the legacy you wish to leave for your loved ones. Take time now to evaluate your beneficiaries, consider a conversion of your traditional IRA to a Roth IRA and discuss the option of charitable remainder trusts or direct charitable beneficiaries.

There are a number of options to help you reach your retirement goals, and it’s important to work with the right professionals and have a proper plan in place.

About the Author

Tony Drake, CFP®, Investment Advisor Representative

Founder & CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
Can AI Beat the Market? 10 Stocks to Watch
stocks

Can AI Beat the Market? 10 Stocks to Watch

An artificial intelligence (AI) system identifying high-potential equities has been sharp in the past. Here are its 10 top stocks to watch over the ne…
January 14, 2022

Recommended

What Assets Should Be Included in Your Trust?
estate planning

What Assets Should Be Included in Your Trust?

A revocable living trust is a great tool to help your assets pass smoothly to your beneficiaries, and it can significantly reduce the headaches of pr…
January 16, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
January 11, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022
Uncomfortable Lessons I Have Learned in Estate Planning
estate planning

Uncomfortable Lessons I Have Learned in Estate Planning

A personal story from a financial planner’s own family illustrates the importance of being prepared … and what happens when your parents aren’t.
January 1, 2022