The SECURE Act – What You Need to Know

Last week I gave a presentation to a room of thirty folks at the Hale Senior Activity Center in Dunedin, Florida, and not a single person in the room knew what the SECURE Act is. Here is a brief look at the SECURE Act and who it effects.

The SECURE Act took effect on January 1, 2020, and it is the most sweeping federal legislation to affect retirement planning in more than a generation. The most significant changes under the new law relate to how distributions from the retirement plan must be paid out following the death of the account owner (and his or her surviving spouse). The “stretch” distribution rules previously in place have, with certain exceptions, been largely eliminated in favor of a 10 year payout. This change is expected to raise $15.7 million over the next 10 years for the U.S. Treasury.

The SECURE Act is most likely to affect:

1. Those who use trusts as part of their planning for retirement assets.
2. Those for whom retirement accounts are a significant portion of their wealth; for example, those with retirement accounts (over $500,000).
3. Those who have a small number of account beneficiaries, so that each beneficiary’s share is relatively large.
4. Those who are leaving their accounts to adult children or minor children who are almost adults.
5. Those who have named grandchildren as beneficiaries to their IRA (because they will no longer get a stretch).
6. Those whose beneficiaries are already in the top income tax bracket, so that any future retirement plan inheritance received will be taxed at the top marginal rate.

The only limited exceptions to the new 10-year payout rule are certain “Eligible Designated Beneficiaries,” as defined in the law, such as the minor child of the account holder up until the age of majority. Under the new rules, leaving an IRA to grandchildren (even if they are minors) will not provide a stretch distribution.

Your prior planning with respect to your retirement plan assets may no longer be optimal. And there is no one-size fits all solution. The facts and circumstances of each case need to be analyzed to determine what changes should be made to your wealth planning, and I am happy to work with financial advisors to do so. The fact is, an update now will likely provide your heirs a significant tax savings and ensure that your estate plan is still accomplishing your goals.