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THE SECURE ACT: WHAT YOU NEED TO KNOW

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The Secure Act. Federal legislation that changes the way we pan retirement.

The Secure Act. Federal legislation that changes the way we pan retirement.

The Secure Act was signed into law by the president on December 20th, 2019.

The Secure Act… Sounds great, right! Sounds like something that absolutely makes us more secure by simply reading the title. But this title, like many others, can be deceiving. For years we have heard rumors of a piece of legislation that may change the way that IRAs and other qualified assets function and finally, the “Secure Act” is it.

Qualified funds are those that are saved, pre-tax, before the money hits your paycheck and is diverted straight into a qualified fund like a 401k or IRA. These funds are allowed to grow, be invested, and with the additional buying power of securities within the environment of a traditional IRA, for example, can accumulate more wealth (theoretically) over time than if you purchased investments such as stock after payroll taxes were deducted. Many employers also participate in matching plans that is essentially “free money” that can help you accumulate more wealth to be used for retirement. When you pull money out of a traditional IRA you do not pay taxes on the gains but do pay income taxes on the distributions. So, this is a great deal for retirement savings but what if the government can simply vote to change those rules? Well, that is what they just did with The Secure Act. How can these changes impact you?

Previously the age where you were required to start taking Required Minimum Distributions or RMDs as industry jargon refers to these mandatory distribution was 70 1/2 years old. The Act pushes back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72, and allows traditional IRA owners to keep making contributions indefinitely.

Non-Spouse Beneficiaries, generally children, of Traditional IRAs and 401(k)s could previously spread the distributions from that qualified asset over their lifetime to maximize the total distribution and minimize the income tax the beneficiary would have to pay on all distributions in any given year. This strategy was often referred to as the “Stretch IRA”. However, the Act forces these distributions to non-spouse beneficiaries to be spread over a maximum of a 10 year period. Under the Act, there could be significant loss or reduction in actual savings that are passed to a child beneficiary of a retirement asset. Each distribution the child takes during a year is taxable as income. Large annual distributions could force the child’s income to be taxed at the highest level which could take a large chunk of the intended distribution. So, now that the Stretch IRA strategy has been all but eliminated when passing wealth to the next generation, what is the new strategy?

ACCUMULATION TRUSTS: Accumulation trusts would allow for the IRA distributions to be deposited into the trust for pay outs to a beneficiary over periods longer than 10 years. This may be very important when there is concern as to how a beneficiary may spend large distributions unwisely or in a short period of time.

DISCLAIMER: There is a procedure by which a Trustee of which the IRA is a beneficiary may disclaimer the inherited IRA benefit and pass that benefit to the next generation. For example, disclaimer the benefit from child, presumably due to being in a higher tax bracket, to a grandchild.

KEY POINTS:

    • Age of Required Minimum Distributions is now 72 years.
    • Traditional IRA owners may keep making contributions indefinitely.
    • Non-Spouse IRA beneficiaries must take distributions within 10 years.

 

NEXT STEPS? Those using individual beneficiaries for their IRAs may want to reconsider their beneficiary designations and consult with an estate planning or elder law attorney to reconsider their estate plan and how the IRA beneficiaries and their overall plan may be impacted under the Secure Act If you would like to sit down and discuss your estate plan with an attorney at McIntyre Elder Law please call: 704-749-9244 or online at: mcelderlaw.com.

Greg McIntyre Elder Law Attorney

Greg McIntyre Elder Law Attorney

Greg McIntyre JD, MBA Elder Law Attorney

written by:

Greg McIntyre

Elder Law Attorney

704-749-9244

greg@mcelderlaw.com

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