How the Secure Act May Impact Your Retirement and Estate Planning

The most significant retirement legislation in a decade was signed into law just before Christmas.  While the name Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) implies helping Americans with retirement, not all of the changes are good.  We at Capital Planning Advisors, would like to summarize the key takeaways of the SECURE Act.

  1. Working individuals can now contribute to IRAs beyond the previous 70 ½ age restriction. Thumbs up!
  1. Required minimum distributions (RMDs) age increased from 70½ to 72, for those who have not attained age 70½ by December 31, 2019. Thumbs up!
  1. Inherited IRA’s (ROTH or Traditional) must be fully distributed within ten years from date of death, eliminating the “Stretch IRA” over the beneficiary’s life expectancy. Exceptions include spouse, minor children up to age of majority, chronically ill/disabled, and individuals not more than 10 years younger than account holder. Thumbs way down!

The elimination of the Stretch IRA is one of the most substantial changes of the SECURE Act and is estimated to extract about $15.7 billion in tax revenues over the next decade from IRA inheritors.  The Stretch IRA has become a staple estate planning technique that now needs to be revisited given the acceleration of withdrawals.  There are alternatives we can discuss with you if your goals include providing lifetime income to your beneficiaries.  Note that the elimination of the Stretch IRA does not apply to those currently receiving IRA distributions as this law only affects those who inherit after 12/31/2019.

IRAs with a Trust named as beneficiary (“See-Through Trusts”) should immediately be reviewed as trust language is usually drafted to only allow access of RMDs to trust beneficiaries.  This could result in a lockup of funds as there is no actual RMD until after the 10th year.

ROTH strategies are much even appealing now as distributions will be tax-free to beneficiaries.  Any approach taken to address these changes should be considered in the context of a comprehensive financial plan that incorporates your long-term goals/priorities and current financial situation.  The good news is there are sound planning strategies to implement that can meet your objectives.