The Secure Act and Protecting Wealth for Future Generations
The SECURE Act could change the ways that affluent Americans pass their wealth on to the next generations. Are you ready?
With about 10,000 baby boomers turning 65 every day, the Setting Every Community Up for Retirement Enhancement Act of 2019 is well timed. It’s a major piece of legislation that’s ostensibly designed to make it easier for working Americans to save for retirement. The Act makes changes to several components of the law around retirement savings.
For one, it paves the way for long-term, part-time workers to participate in 401(k) plans. It also allows 401(k) plans to offer annuities. And, as a reflection of the fact that retired Americans are living longer now than they did in recent decades, the Act pushes back the maximum age at which retirement plan holders must start taking required minimum distributions. Previously, retirees had to start taking RMDs by age 70 1/2. Under the SECURE Act, they don’t have to take RMDs until age 72.
But one of the biggest changes, and the change that may most affect affluent families, is around IRA payouts. Thanks to the SECURE Act, passing assets to your heirs in this way may not be as easy as it once was.
IRA Changes: No More Stretch Payouts
A change to the way nonspouses can access inherited IRA payouts is one of the most significant elements of the SECURE Act. Before this law’s enactment, an affluent parent could transfer wealth to their children via an IRA, with the children withdrawing that money gradually over a lifetime. Stretching those distributions out over the course of decades would provide the heirs with a steady, tax-advantaged income.
Now, a nonspouse beneficiary only has 10 years to withdraw all the money left to them in an IRA. This change has major tax implications for heirs. Say a parent establishes an IRA containing $5 million and leaves this to their 25-year-old child. Before the SECURE Act, that heir could have received annual distributions of $125,000 over 40 years, taking them all the way to their own retirement and minimizing their yearly tax bill. Now, that heir would have to drain the account by the age of 35. Say the account still holds $3 million when that 10-year deadline arrives – the beneficiary will lose a significant chunk of their inheritance to taxes that year. This change may also force young beneficiaries into higher tax brackets.
There are exceptions for certain nonspouse beneficiaries, like those who are disabled or less than 10 years younger than the account owner, but this provision will affect a lot of American families. The elimination of the stretch option could worry some affluent investors who are concerned about their heirs accessing too much money too soon.
Reacting to the SECURE Act
There are some retirement planning options available that allow account owners to sidestep the 10-year limit imposed by the SECURE Act. For one, a married account owner could decide to split IRA beneficiaries, naming both a spouse and child to inherit the funds. The 10-year clock starts for the child when the account owner dies, while the spouse can manage their own distributions. Assuming the surviving spouse doesn’t spend all of that money, those assets may eventually also go to the child when the second spouse dies.
Trusts can also be a really useful tool in these circumstances. As one example, an account owner may opt to create a Standalone Retirement Trust to act as the beneficiary of their IRA, maintaining a much greater level of control over how their assets are distributed than they might with standard beneficiary designations. Trusts can be used in other ways to protect your assets and minimize tax obligations under the SECURE Act.
These are complicated issues, only made more complicated by the enactment of this new law. Your attorney, CPA and the other financial planning professionals on your team can craft the strategies that will best suit your needs and your wishes around how your heirs access their assets.
Now that the SECURE Act is law, have you reviewed your retirement plans and made any necessary changes? If you’ve worked hard to accumulate wealth that you want to pass on to your children and grandchildren, make sure your plans are optimized under the current laws. Contact Livingston & Haynes for guidance.