2198 East Camelback Road
The recent federal government spending package enacted on December 20, 2019 included the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is the most significant change to retirement legislation in more than a decade. All provisions take effect on or after January 1, 2020.
While much of the Act is beneficial, there is one important change that will impact investors with significant assets in traditional IRAs and retirement plans.
Prior to the SECURE Act enactment, non-spouse beneficiaries (most commonly children) who inherit traditional IRA and retirement plan assets could spread distributions — and therefore the tax obligations associated with them — over their lifetimes. This ability to spread taxable distributions from an inherited IRA or other retirement plan, over potentially a long period of time, was commonly referred to as the "stretch IRA" rule - the beneficiary could stretch distributions over their lifetimes, reducing each future years tax impact.
The Act generally requires any beneficiary who is more than 10 years younger than the account owner to liquidate the account within 10 years of the account owner's death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child. This means your spouse will be able to continue to stretch distributions over their lives but most other heirs will need to take distributions over 10 years. This shorter distribution period could result in unanticipated tax bills for beneficiaries who inherit significant amounts in traditional IRAs or employer retirement plans.
If you do have a significant amount of your planned estate in traditional IRAs or employer retirement plans, you may want to revisit how these tax deferred dollars fit into their overall estate planning strategy. For example, it may make sense to consider converting traditional IRA funds to Roth IRAs, which can be inherited income tax free. Although Roth IRA conversions are taxable events, investors who spread out a series of conversions over the next several years, or tactically during low income tax years, may benefit from the lower current income tax rates.
The SECURE Act also includes several potentially beneficial provisions, including:
We will be incorporating these significant changes as we update retirement and estate plans. If you would like to know more about how these changes might affect you, please reach out.
As always, my best,