The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, is full of changes — some subtle, some not so much — designed to expand retirement savings opportunities for Americans of all ages.
The legislation allows older workers to keep contributing to their IRAs as long as they have earned income. It pushes back the start date for taking required minimum distributions (RMDs) from 70½ to 72. It also should make it easier and less expensive for small-business owners to set up retirement plans for their employees.
That’s the good news.
The bad news? The new law takes most of the stretch out of the “stretch IRA,” a popular tax-saving strategy for non-spouse beneficiaries who inherited all or part of a loved one’s tax-deferred retirement plan.
Before the SECURE Act took effect on Jan. 1, 2020, a beneficiary who inherited an IRA or similar tax-advantaged retirement account could take required minimum distributions (RMDs) based on his or her life expectancy. The withdrawals could be stretched over decades, along with the income taxes owed on them. Now, most beneficiaries will be required to draw down that inherited account and pay the taxes on it within 10 years of the original owner’s death. Amounts they withdraw can vary from year to year. The account, however, must be withdrawn in its entirety over a 10-year span. Those who fail to do this will face a 50% penalty of the amount they should have withdrawn, on top of the taxes they owe.
These accelerated payments will, of course, be a boon for the IRS. The Congressional Research Service (opens in new tab) estimates the new rule will generate about $15.7 billion in taxes over the next 10 years. But it could be a big problem for beneficiaries who might be pushed into a higher tax bracket, because many inheritors could be taking those compressed withdrawals during their peak earning years.
That means a lot of parents, grandparents and other generous benefactors must reassess their estate plans — or risk leaving behind a gift that’s burdened by tax consequences.
The change doesn’t apply to certain beneficiaries, including surviving spouses, inheritors who are disabled or have a chronic illness, minor children, or those who are within 10 years of the age of the deceased. And those with inherited IRAs established before Jan. 1, 2020, are grandfathered in (to their great relief, I’m sure). But others should act as soon as possible to avoid leaving behind a can of very expensive worms for their loved ones.
What should you do if you’re worried the SECURE Act is threatening the security of your legacy plan?
1. Call your financial adviser or estate attorney
Ask to go over your estate plan and talk about what changes could be made to ensure it’s as tax-efficient as possible for your beneficiaries. It’s always a good idea to review your beneficiaries regularly, just to be sure your designations are up to date and remain consistent with your objectives. But if the SECURE Act has turned your plan into a tax time bomb for your adult children, or if your hope was to provide lifetime income for an undisciplined spender, you’ll probably want to work out a different strategy.
2. Consider the benefits of a Roth conversion
Under the SECURE Act, an adult who inherits a Roth IRA is still required to empty the account within 10 years. But unlike a traditional IRA, those distributions will be tax free. You may find it makes sense to take the money from your tax-deferred retirement account now, pay the taxes on it yourself and convert those funds to a Roth account for your children to inherit. Talk to your financial adviser about spreading out those withdrawals over the next few years in a way that also minimizes your tax bill. (You have until the end of 2025 to take advantage of lower tax rates put in place by the Tax Cuts and Jobs Act.)
3. Review any existing trusts
If you’ve designated a trust as the beneficiary of your IRA (or other defined contribution plan), you should check with your estate planning attorney to see how the SECURE Act could affect distributions. The language in certain types of trusts — including popular “see-through” or “pass-through” trusts — could make them problematic now that the SECURE Act is in place. An estate attorney can determine if your trust still can accomplish your intended goals or if you need an alternate plan.
4. Consider a charitable remainder trust
A charitable remainder trust could be a good replacement for legacy plans that have lost their pre-SECURE Act luster. As an income beneficiary of this type of irrevocable trust, your loved one would receive a percentage of the trust’s assets for a specified period of time (usually longer than a decade). Then, when that time is up, the remainder of the trust’s assets would go to a designated charity. Again, your financial adviser and an estate attorney can go over the details of this plan and help you determine if it’s appropriate for your situation.
Don’t let your well-intentioned gift become a worry for your beneficiaries and a windfall for the IRS. Take steps now to minimize the tax consequences in your legacy plan. Your loved ones will thank you.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Scott Tucker Solutions, Inc., are not affiliated companies.
Scott Tucker Solutions, Inc. has a strategic partnership with tax professionals and attorneys who can provide tax and/or legal advice. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way. 573941
Kim Franke-Folstad contributed to this article.
Appearances on Kiplinger.com were obtained through a paid PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Scott Tucker is president and founder of Scott Tucker Solutions, Inc. (opens in new tab) He has been helping Chicago-area families with their finances since 2010. A U.S. Navy veteran, Scott served five years on active duty as a cryptologist and was selected for duty at the White House based on his service record. He holds life, health, property and casualty insurance licenses in Illinois, has passed the Series 65 securities exam in 2015 and is an Investment Adviser Representative.
What Time Is the Stock Market Open Today?
Markets When does the market open? True, the stock market does have regular hours, but trading doesn't stop when the major exchanges close.
By Michael DeSenne • Published
Atlassian Is a Zombie Stock Set to Go to Zero, Noted Tech Bear Says
Atlassian stock is down 64% this year and one strategist says it has farther to fall.
By Dan Burrows • Published
How Parents Can Teach Their Kids About Cryptocurrency
Starting with explaining the concept of money to begin with can help them grasp the concept of digital currencies.
By Neale Godfrey, Financial Literacy Expert • Published
How Do You Overcome Stage Fright? These 6 Tips Can Help
Many people fear public speaking more than they fear death, yet advancing professionally could depend on whether you make a good impression when you step up to the microphone.
By H. Dennis Beaver, Esq. • Published
2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)
If you’re retired and find yourself sitting on a “tax bomb,” you may think there’s nothing you can do. But two strategies could seriously reduce your taxes in retirement.
By David McClellan • Published
5 Trends in High-Net-Worth Philanthropy
Wealthy families and organizations are giving more to charity but also targeting funding to fewer grants in their efforts to create bigger impacts.
By Hannah Shaw Grove • Published
6 Ways a DAF Can Make Your Year-End Giving Better Than Ever
Giving appreciated assets instead of cash could be the most tax-smart move you can make with a donor-advised fund, but wait, there's more…
By Stephen Kump • Published
Life Insurance Strategies to Consider When You Own a Family Business
Not only can life insurance replace lost income, but it can help with estate taxes and provide a sense of fairness for family members who don’t participate in the business.
By Howard Sharfman • Published
Short-Term Investments to Protect Against Inflation and Market Volatility
Rates on Series I savings bonds, T-bills and fixed annuities are all above historical averages and could serve investors well during turbulent times like these.
By Bradley Rosen • Published
What’s the Difference Between Average and Actual Rate of Return?
An average rate of return can mask losses over time, so what investors really want to keep an eye on is the actual rate of return.
By Carlos Dias Jr., Wealth Adviser • Published