How the Secure Act Affects You

The “Setting Every Community Up for Retirement Enhancement Act of 2019” aka the “SECURE ACT” has made some significant changes to retirement planning and estate planning. Although there have been changes which will require you to consult your financial planner and your estate planning attorney, the fundamentals of these two practices will remain the same.

Notable Positive Changes:

The age to start taking required minimum distributions has been extended from 70.5 to 72. This gives you an additional year and a half of savings before you need to start tapping in to your qualified retirement accounts – which is great, considering that people are living longer and working longer.

Not only can you save that money longer, but you can contribute towards your account longer, too. You are no longer prevented from adding more money into the pot once you reach 70.5. Many people continue working well past 70.5, and this enables them to still receive that tax deferred growth by contributing to their qualified plan.

Annuities have opened up as a new option in 401(k) plans by employers. This could be a great opportunity for stable growth of your retirement funds if your company chooses the right annuity.

It also cuts most of the red tape from multi-employer retirement plans, and allows for more part-time workers to participate in employer-sponsored retirement plans. This could have a significant impact on those who work in small businesses, or those who work multiple part-time jobs.

Notable Negative Changes:

The SECURE Act has done away with “stretch” IRAs, meaning that if someone inherits an IRA from a deceased relative, they must now drain that account within 10 years instead of stretching it over their life expectancy (some limited exceptions to this new rule apply).

In the short term, this means more taxes for the government and less money for inherited IRA recipients. In the long term, it will mean pursuing different wealth transfer strategies or carefully considering beneficiary designations to weigh the ultimate financial impact.

Here’s and example to show the difference between a stretch IRA and then new 10 year maximum:

Will’s father passes away in January 2020 with a qualified IRA valued at $200,000. Will is listed as the sole beneficiary. Under the old rules, Will was able to take or “stretch” his required minimum distributions of this account over his projected life expectancy. Let’s say that means each month he is required to withdraw $500, for a total of $6000 per year. Will’s income stays below the next tax bracket threshold, so there is little taxable impact upon him for these distributions – at the 24% tax bracket he pays $48,000 in taxes over the course of his lifetime on that $200,000.

Under the new rules, Will can’t stretch his IRA to his life expectancy. Instead, he must withdraw the entire $200,000 within 10 years of his father’s death. This means Will has to take out all of the money by the end of ten years, either as a monthly distribution or a lump sum at the end. That would be $20,000 per year, enough to bump him up a tax bracket to 32%. If he takes it out in even early installments, he would pay $64,000 in taxes on that $200,000 – costing him $16,000 more in taxes over that 10 year period.

If Will takes it out as a lump sum, that skyrockets his taxable income to the 35% threshold. That means he pays $70,000 in taxes on that $200,000, or $22,000 in additional taxes.

Clearly, the loss of the stretch IRA comes as a blow to those planning on passing on their qualified retirement savings to their beneficiaries. Many of our clients are rethinking beneficiary designations on IRAs and turning more towards Roth IRAs and insurance to meet their estate planning goals.

So where do we go from here? The first step is to talk to your financial planner. Depending upon your situation, the SECURE Act could have little or no impact upon you or your beneficiaries. Once you have updated your retirement strategy accordingly, reach out to your estate planning attorney to see if your estate planning documents need to be tweaked accordingly.