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SECURE Act – Legacy Planning

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  • SECURE Act – Legacy Planning

by | Feb 28, 2022

Did you know that one of the changes in the SECURE Act should be considered in your legacy planning???  Well … now you do!!!

The SECURE Act (Setting Every Community Up for Retirement Enhancement) came into effect on January 1, 2020, and the primary aim of the legislation was to enhance financial security across the country. There were, of course, a lot of items included in this legislation, but three areas to highlight include the following:

  • Removal of IRA Contribution Age Limit – For taxable year 2020 and beyond, the law removed the age limit at which an individual can contribute to a traditional IRA. It was 70.5 years, and now there is no age limit. Very nice! This allows people who are still working to contribute to their retirement accounts and encourages continued saving.
  • Increased Age for Required Minimum Distributions – The law increased the RMD age from 70.5 years to 72 years allowing funds in IRA’s to grow tax deferred for longer. I like this one too as it should, in theory, help retirement savings grow and last longer.
  • Removal of the Stretch Option for Most Non-Spousal Beneficiaries – Under the new rules, most non-spousal beneficiaries will be required to withdraw and pay taxes on all distributions within 10 years of the death of the original account holder. This is in contrast to the previous law that allowed non-spousal beneficiaries to “stretch” an inhereted IRA over their lifetime. Sadly, I’m not a fan because, in my opinion, it does more to help the government collect taxes sooner than “enhance financial security across the country.” That said, this is where Legacy Planning comes into play, so let’s get to it!

This is where Legacy Planning comes into play!

Again, before the SECURE Act, non-spousal beneficiaries could stretch distributions over their life-time, like spousal beneficiaries can now. Now, after the SECURE Act, most non-spousal beneficiaries have to withdraw the entire balance of the inherited IRA within 10 years and pay taxes. Yuck!

So, who is typically inheriting money as a non-spousal beneficiary? Usually, children inherit the IRA after both parents pass, and typically those children are in their prime earning years at 50-65 years old. Inheriting a large IRA at that point and being required to withdraw it and pay taxes in the next 10 years could present a large tax liability, even if the non-spousal beneficiaries don’t need it and intend to save it to pass on to the next generation.

So, what can we do about it? It’s time to plan ahead and consider Roth IRA’s. First, if this scenario is in your foreseeable future, consider Roth Conversions while the original IRA holder (parents in this example) are still alive. Roth Conversions allow the original IRA holder to convert funds from a Traditional IRA to a Roth IRA and pay taxes at their tax rate. If their tax rate is lower than the anticipated tax rate of the future beneficiaries, then this may make sense. Second, if you think tax rates are going up and understand the new non-spousal beneficiary rule, it may make sense for you to contribute to a Roth IRA along the way so that your non-spousal beneficiaries don’t stand to inherit a gigantic IRA with an equally gigantic 10 year withdrawal tax bill.

Here at Virtus Wealth Management we keep up with the legislation changes that impact our clients and adjust/plan accordingly. We anticipate more changes with the SECURE Act 2.0 in 2022, and we are here to help!

The content provided herein is based on our interpretation of the SECURE Act and is not intended to be legal advice or provide a tax opinion.

This document is a summary only and not meant to represent all provisions within the SECURE Act.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion.

These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.

In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

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