The SECURE Act is Now Law — The Changes are Significant
Estate planning should never be considered a one-time event. In reality, an individual’s estate plan must continually adapt to changes in their lives and changes to the law. Laws change all the time, but often the changes have limited impact on the average estate plan.
Every now and then changes in the law can have a SIGNIFICANT impact on the average estate plan. This is the case with the recently passed SECURE Act. It will significantly impact most trust-based estate plans, and it specifically targets changes in retirement planning.
A Little Information About the SECURE Act
On December 20, 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law by President Trump. The law is designed to increase retirement savings, and it includes many taxpayer-friendly measures. The law also includes a few key changes where most families will need to re-evaluate their current estate plans and recalibrate their plans around the new law.
The Bell Law Firm highly recommends all clients understand the changes and how it can impact their own plan, and we encourage clients to visit us in the future about the impact on their own individual plans. In addition, we are working on a systematic way to help everyone do this.
What Really Changed With the SECURE Act
There are a few key changes, and we’ll highlight the most impactful ones here, but this is by no means a comprehensive list:
1. General Elimination of the “Stretch” IRA
As a part of the funding needed to implement the SECURE Act, the new law requires most non-spousal beneficiaries to withdraw all assets from an inherited account within ten (10) years. Under the old law many of these assets could remain in the inherited, tax-deferred account for 30-40+ years.
There are exceptions to this new requirement like spouses and minors up to the age of majority. But ultimately, this means the old plan of using a “stretch IRA” to extend required distributions over a beneficiary’s life expectancy and to defer income taxes has been generally eliminated.
This change provides multiple billions of tax revenue for the IRS. The tax impact, the asset protection impact, and the overall estate planning impact for many families is significant. This change should cause many families to reevaluate their current estate plans, especially those families with a significant part of their wealth in 401(k) plans, IRAs, or other retirement accounts.
2. The Required Minimum Distribution (RMD) age has been raised to age 72
Under the old law RMDs were to start at age 70.5 for an individual’s plan. The RMD amounts are based on an IRS table using normal life expectancies. In raising the RMD age to 72, retirement assets will have more time to grow in a tax-deferred manner. Ideally, this change will help increase retirement savings.
3. Contributions to a Traditional IRA Can Continue After Age 70.5
Since many are finding a need or desire to continue working during their retirement years, this change provides additional retirement savings opportunities for those with earned income.
4. 401(k) Plan Administrators Have Additional Reporting Requirements
This change is intended to make it much easier for 401(k) participants to see how their retirement savings will correspond to monthly income during retirement.
5. 401(k) Sponsors Have New Investment Alternatives, Including Annuities
The law removed some of the inherent risks of offering these income-oriented investment alternatives, so look to see more of these options for retirement planning.
6. 401(k) Sponsors Can Pool Resources to Provide Increased Retirement Planning Options for Small Businesses
The new law encourages small business owners, or other affiliated groups, to pool their assets to provide increased retirement planning options to their employees or members.
So What Should I Do About the Changes From the SECURE Act?
The answer to this question is very client-specific, so there are no simple, one-size-fits-all solutions. We encourage our clients to first get informed about the SECURE Act, and think about how these law changes may impact their plans. If you have questions, or are confused, or if you want to review your individual plan, we encourage you to set up a time to review it in the near future.
Every plan is different, and families have different priorities with their planning. Unfortunately, many baby boomers and younger families have a significant share of their wealth in their retirement plans like 401(k)s, IRAs, etc. As a result, these law changes, especially the eliminations of the Stretch IRA, will require many to recalibrate their plans.
The income tax planning related to the next generation versus the income tax difference resulting from large IRAs paying out to a trust with higher tax rates can be significant. Additionally, the ability to continue providing asset protection for the next generation can be significantly impacted with the elimination of the Stretch IRA. It is absolutely critical for families to understand the changes from the SECURE Act. It is just as important for these families to meet with their advisors to understand how to accomplish their goals in the new environment.
We look forward to a chance to review your planning with you in the future. It will be a very busy time with all these law changes, and more information will become available over time on the SECURE Act. Rest assured, the impact of the new law is very significant. There will be confusion on the law changes, there will be an increasing amount of information provided on the law changes, and there will be some trying to take advantage of the law changes. All of this is to be expected.
If you do decide to meet with us, we will do our best to help you understand how the new law impacts you and your own individual plans. Ultimately, clients will need to decide what changes, if any, they need to make to their current plan in response to the law changes. However, we are happy to help you with that process.
If we can be of assistance, feel free to call us at (913) 345-2323.