The Secure Act was signed into law December 20, 2019, and became effective January 1, 2020. If you own an IRA or have a defined contribution plan at work or if you will potentially inherit once of these assets, then this law changed everything. Robert Keebler, CPA, MST, AEP puts it this bluntly “Everyone needs to reconsider everything.”
The new law changed required minimum distributions (RMDs), contribution rules, college planning opportunities and many more. The most devastating issue for savers is the elimination of the Stretch concept for your beneficiaries.
The Secure Act- really named Setting Every Community Up for Retirement Enhancement– is expected to raise $16.4 billion in tax revenue over the next decade. Of that amount, $15.7 billion is expected to come directly from the elimination of the stretch IRA.
There is no tax code that discusses ‘the stretch IRA.” There were a series of codes that allowed the concept to work and the name was appropriate and clear. When you die you have three potential types of beneficiaries: a spouse, a non-spouse or an entity like a church or university.
None of the rules have changed regarding your spouse or a charity. Your spouse has the ability to roll your retirement assets into their name (assuming they are your named beneficiary) and treat the IRA as they would normally do based on their age. The same is true if you left the money to a charity. Nothing has changed.
All other beneficiaries have been impacted. The stretch concept allowed us to take income out of the IRA in the form of a Required Minimum Distribution (RMD) based on the beneficiary's age if you happen to pass away before attaining age 70.5. If you passed after that age your beneficiary had to take the money out over your life expectancy. Yes, I know. It seems crazy you have a life expectancy after you are already dead but those are the rules.
The new law eliminated the RMD’s from being required at all by your beneficiaries. But unless the beneficiary is one of the rare exceptions (minor children, someone closer than 10 years of age to you, disabled or chronically ill) they will have to take all the money out of the account by the end of the 10th year. This includes Roth IRA’s as well.
This means that your heirs are likely to inherit IRA assets during their highest income years. The highest income also translates to the highest tax rate they may ever find themselves. This requires a new level of thought, planning, and strategy to find the best-case scenario for you and your family.
This brings back into play yet another reason why Roth conversions at your tax rate might be in the absolute best interest of your beneficiary and protecting the wealth you accumulated. Roth IRA’s are always best for your beneficiary as they owe nothing more in taxes. They are not always best for you. This new legislation is one more weight in favor of conversions for many families.
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