How the SECURE Act Affects Your RetirementBy Lee Korn | February 6, 2020
Retirement planning serves one true purpose—preparing for your future so that you can live the life you want when you decide to step away from the workforce. Think of it as your financial freedom plan.
Smart planning doesn’t have to be complicated, but building a nest egg that’s built to last does require staying up to date on new laws that will directly affect your retirement plan. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect on January 1st, is triggering some significant changes to IRAs and 401(k)s. Some of these tweaks will maximize your savings efforts, while others could have a major impact on how your wealth is eventually passed down to your heirs.
The SECURE Act is up and running, and it deserves your attention. Read on for a breakdown of how it will affect your retirement and beneficiaries.
What is the SECURE Act?
The SECURE Act, which will impact virtually everyone saving for retirement, was wrapped into a larger government spending bill that passed at the end of 2019. As the name implies, it’s designed to make it a little easier for folks to save for retirement. There are parts of the act that certainly check off this box. (We’ll touch on these shortly.)
However, the SECURE Act is also making it considerably harder for your heirs to inherit your retirement accounts. You can expect more red tape that translates to higher tax bills for your beneficiaries. The silver lining is that there are financial moves you can make now to protect your wealth so your loved ones can rely on it when the time comes.
How the SECURE Act Affects Your Heirs
Before we talk about the savings benefits for you, let’s dig into the implications for your beneficiaries—and, more importantly, how to work around them. Most estate plans account for retirement funds you may have in your name after you pass on. Naming beneficiaries allows them to inherit these assets. For many families, it’s a nice stream of income for their loved ones that’s could last for decades.
These accounts are commonly known as “stretch IRAs” because they let beneficiaries stretch that money out over a long period of time. On top of providing income, they can also reduce their tax burden since they allow for smaller distributions (which result in a smaller tax bill).
The SECURE Act is effectively eliminating the stretch IRA for many beneficiaries, who will now have to withdraw all inherited IRA and 401(k) funds within 10 years. This means larger distributions made within a shorter window of time—with more cash going to Uncle Sam.
There are some exceptions, of course. Surviving spouses, minor children, the disabled and the chronically ill, for example, are exempt from the 10-year rule. But for most beneficiaries, tax hikes could be on the horizon.
How to Protect Your Wealth and Your Heirs
Safeguarding your wealth for your heirs comes down to estate planning, specifically zeroing in on your will, trusts and any retirement accounts you have. The first step is meeting with an experienced wealth advisor who understands the SECURE Act’s many nuances. The new law is making it harder to convert your retirement assets into a long-lasting source of income for your heirs, but there are perfectly legal ways to get around this.
The first is to think about establishing a charitable remainder trust. These trusts are traditionally used as a bridge that allows you to leave money to your favorite charities. They can also pull double duty—unlocking income for your heirs while they’re in route. Simply name them as the income beneficiary of the account. Upon your death, they’ll be able to take distributions gradually for as long as they like until the trust expires or they themselves pass on. At that point, your designated charities will inherit the balance. It’s a strategy that allows a charitable remainder trust to mirror a stretch IRA. You’re also giving to charities you care about; it’s a win-win.
Roth IRA conversions are another worthwhile option that can dramatically reduce taxes for your heirs. With a traditional IRA, you pay taxes when you withdraw funds in retirement. Distributions from Roth IRAs, on the other hand, are tax-free. Converting a traditional IRA to a Roth is one option for lowering a potentially substantial tax bill for whoever inherits it—especially if you’re passing on a high balance and are hoping for those funds to last several decades. You will have to pay taxes on the amount you convert to a Roth IRA, but the future savings still make it an attractive option. Ask your wealth advisor about which strategies would mesh best with your overall retirement plan.
Benefits of the SECURE Act
While the SECURE Act creates some financial hurdles for beneficiaries, it also carves out some savings opportunities. Perhaps the biggest positive change is that the Required Minimum Distribution (RMD) age is moving up from 70½ to 72. This means you’ll have an extra year and a half before you’ll be required to begin withdrawing funds from tax-advantaged accounts, including traditional IRAs and 401(k)s. This will help ease the tax burden for many retirees.
Another perk of the SECURE Act is that you can also save more in a traditional IRA. Before this law took effect, you could kick into this type of account up until age 70½. You’re now able to continue contributing—and enjoying the tax benefits—for as long as you’re still earning income; regardless of age.
Business owners are in for another added benefit. In the hopes of encouraging businesses to offer workplace retirement plans, the SECURE Act is doling out up to $3,000 in tax credits to companies that sponsor new 401(k) plans in 2020. This is big news since startup costs are traditionally the main hurdle in launching a 401(k) program.
The SECURE Act is bringing some sweeping changes that might affect your retirement plan. Opal Wealth Advisors can help you take advantage of these new benefits while also protecting you and your heirs from tax surprises along the way. Contact us today to put yourself in the best position for success.
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