What You Need to Know About the SECURE Act
There are several changes to be aware of now that the Setting Every Community Up for Retirement Enhancement (SECURE) Act, has been signed into law. It gives some individuals more time for accumulating tax-deferred savings before they have to take distributions, while potentially shortening such time for holders of inherited retirement accounts.
The SECURE Act could affect your savings in the following ways:
- It repeals the prohibition of retirement contributions after account owners reach age 70½.
- It delays required minimum distributions from age 70½ to 72.
- It permits penalty-free withdrawals of up to $5,000 from retirement accounts to help pay for childbirth or adoption expenses.
The Act’s Effect on IRAs
Another provision could have a significant effect on the way IRA inheritances are set up. It eliminates the lifetime “stretch” option when non-spouses inherit an IRA. Rather than stretching out the withdrawal of the inherited retirement account over their lifetime expectancy, these beneficiaries must deplete the inherited balance within 10 years of the decedent’s death. This change applies unless the new account holder is:
- A child of the employee who has not reached the age of majority (account would need to be distributed within 10 years of reaching the age of majority)
- Disabled or chronically ill
- No more than 10 years younger than the employee
In most instances, earlier withdrawals result in substantially less tax-deferred growth, as well as more taxes due. To help mitigate the potential negative ramifications, consider the following strategies.
Roth conversions. You may find that accelerating Roth conversions could ease the rapid tax hit on distributions. This is an especially applicable strategy if the beneficiary is in a higher tax bracket than the account owner.
Charities. An account owner could name a charitable remainder trust (CRT) as the IRA beneficiary. These trusts are structured so that a beneficiary would collect a stream of income from the CRT assets for a specified time. Then, the charity would collect whatever is left. Another option involves setting up a qualified charitable distribution. Individuals older than 70½ can make tax-free gifts of up to $100,000 per year from an IRA, payable directly to their chosen charity.
Estate planning. Account owners may want to revise their estate plan to take a more comprehensive asset-by-asset approach, rather than to continue splitting assets by percentage. For example, you might earmark IRA assets to be distributed to minors or individuals in lower tax brackets and designate a larger proportion of non-retirement assets to those with higher incomes.
Secure Your Future
If you have additional questions about the SECURE Act, or would like to review your financial plan and beneficiary elections, please contact our office. As always, we suggest reaching out to your tax professional for tax-related guidance.