Become Secure with the SECURE Act
The SECURE Act brings changes that impact retirement savers and many of our clients. In our Experience 9 out of 10 clients have individual retirement accounts (IRAs or 401ks among others), and 5 out of 10 clients will either inherit a retirement account or will leave a retirement account to children or grandchildren or non-spouses.
Over the past few weeks, our clients have been asking questions about the changes and many have the impression that their retirement accounts will now be taxed differently or somehow will lose benefits of their hard-earned, tax-deferred savings. The taxation of their retirement savings ties to their marginal tax bracket (which has not changed since the tax reform in 2017). In fact the Secure Act has been under review for over 5 years and should be viewed as a net positive for anyone turning 70½ this year or later who lives into their mid to late 80s or longer.
The most significant change is the required minimum distribution age extension to 72 (from 70 ½) coupled with the ability to make contributions past the age of 70 for anyone still actively employed. We in the planning community have long been advocating for changes to these standards that reflect our clients’ working trends, many of whom have extended their work earnings well into their 70s and are living longer. We view this as a change that is prudent and acknowledges the reality that every year we have clients that are either reinvesting or gifting their distributions from IRAs because they are still working, or otherwise don’t need the cash flow at age 70½.
Another change is that inheriting a retirement account from a parent, grandparent, or sibling (non-spouse) will require retirement account beneficiaries to take distributions from the inherited retirement account within no greater than 10 years. For example, a client who inherits $100,000 in an IRA from a parent will need to take on average $10,000 a year, or possibly more if there is any growth in the portfolio. Whereas this would have been only $2,000 to $4,000 a year under past requirements...the so called “stretch” provision based on life expectancy. This is the aspect of the SECURE act that can be interpreted as a faster pace of taxation for retirement account beneficiaries. Distributions from IRAs are counted as taxable income. Many of our clients will spend through their money during their lifetimes, but for those who had planned to leave an IRA to beneficiaries, the new law requires that the IRA will be distributed, and potentially spent, to the beneficiary more rapidly than planned.
For our clients who have set up a Trust with “pass through” language and have named that trust the beneficiary of their retirement accounts, the language should be review to determine if leaving the retirement accounts to a specific individual(s), or if leaving a different type of asset to the trust, will be the best strategy under the new law. Our team would be happy to assist you with that process.
If interested in reading more, see the link below. We certainly encourage you to bring questions about this to any upcoming meeting, or to reach out to our team in the interim.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJA, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James.
