Radical changes to your Estate and Retirement Plans after The Secure Act

If you plan to leave a sizeable traditional retirement account to your heirs, you may want to schedule an appointment with your estate attorney and your financial planner/accountant. The Secure Act (“Setting Every Community up for Retirement Enhancement”) was passed in 2019 and became effective on January 1, 2020. It pulled the rug out from under people who planned, and saved, for years under tax rules that were considered to be certain and established. These worrisome provisions hurt diligent savers primarily affecting non-spouse or other healthy beneficiaries who want to keep inherited retirement accounts as long as possible to maximize tax-free compounded growth, and to minimize income taxes.

The Secure Act made many other changes, but the focus of this short article is to highlight the dramatic and sweeping changes, and the end, to the “stretch IRA” in estate planning. This allowed the retirement account to last, or stretch, for decades based on the life expectancy of that beneficiary for payment of their expenses or their own retirement; or, even allowing it to pass to another, 3rd generation. The Secure Act ended that for most beneficiaries. The full balance must be drained within ten (10) years after death of the original retirement account owner. The beneficiary can take out distributions over the ten (10) years or the lump sum at the end. This results in loss of decades of tax-free growth and withdrawals will jack up the beneficiary’s income tax bracket in the year of receipt. Of course, a Roth is tax-free, but also must come out within the ten (10) years of death of the original retirement account owner.

These new and sweeping rules DON’T apply or change IRAs inherited by the following people: 1. Surviving spouse; 2. Disabled or chronically ill persons; and 3. Beneficiary LESS than ten (10 years) younger than the original IRA owner. These people can continue to “stretch” the traditional IRA based on that beneficiary’s life expectancy. A healthy minor child’s ten (10) year time period to drain the retirement account begins to run when they reach the age of majority; eighteen (18) years of age (in Indiana). Or, if still in school, till age 26 when the ten (10) year period starts to run.

If a trust is named as beneficiary for a healthy child and the trust is an “accumulation” trust that keeps the money into trust beyond the ten (10) year period then when the IRA is cashed out by the trustee, the traditional IRA funds will be taxed at a much higher trust income tax rate.

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