The Setting Every Community Up for Retirement Enhancement (SECURE) Act is one of the biggest pieces of retirement legislation to be passed in years. It will undoubtedly have a major effect on how many Americans approach retirement planning, and particularly estate planning. We’ve covered these changes previously, including focusing on the elimination of ‘stretch’ IRAs for some beneficiaries of IRAs and defined contributions plans1. This could mean a bigger tax burden for many beneficiaries, who may have to empty inherited accounts within 10 years of the original owner’s death. This law will go into effect for all accounts inherited in 2020 and beyond, so now may be the time to review your estate plan.
What is a ‘Stretch’ IRA?
The ‘stretch’ IRA wasn’t another type of IRA, it was an estate planning strategy that allowed beneficiaries to stretch out distributions based on their life expectancy, instead of the life expectancy of the previous owner. This meant that a younger person who inherited an older person’s IRA, 401(k), or other qualified retirement account could have more time for the funds to grow tax deferred and take smaller distributions. For beneficiaries who were concerned about their tax burden, this was helpful.
What Changed?
Most non-spouse beneficiaries must now empty inherited accounts within ten years of the original owner’s death. This means less time for funds to grow tax deferred, and larger distributions that could potentially result in a bigger tax burden.
What Can You Do?
When estate planning for your loved ones, taxes should be taken into account. You should review your beneficiary designations with the knowledge that your beneficiaries will most likely have to drain your account in 10 years if they are not your spouse, a minor who is not your grandchild, less than 10 years younger than you, or a qualifying chronically ill individual. It may also be a good idea to review your trust if you have one, as it may dictate required minimum distributions from retirement accounts.
If you’ve saved for years in a 401(k) or IRA and plan on passing them on in your estate plan, you could consider alternative tax minimization strategies.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Insurance and annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company.
