Question: What is the SECURE ACT and how might it affect my retirement benefits?
Answer: The SECURE ACT is a proposed law that has been passed by the United States House of Representatives and is expected to pass in the United States Senate. Once passed in the Senate, it will be sent to the President for signature where it will become law. If passed, the Secure Act will change some of the rules for retirement plans and how we save for retirement.
Some of the changes are positive to the retiree; namely, the law would repeal the maximum age for traditional retirement contributions, which is currently 70 ½ and increase the required minimum distribution age for retirement from 70 ½ to 72. These changes help retirees who are working longer and wish to contribute to their plans for a longer period of time, and do not want to be forced to take distributions from their IRAs before they are ready.
The law would also allow long-term part-time workers to participate in 401(k) plans and give plan administrators more flexibility in offering annuity products in the 401(k) investment portfolio. It also permits smaller employers to join open multiple employer plans. In addition, parents can withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses and can withdraw up to $10,000 from 529 plans to repay student loans.
However, one of the changes could be detrimental to the inheritors of a retirement plan. Currently, if the owner of a retirement account leaves that account to a beneficiary, that beneficiary has the option to “stretch” that account so they can continue the tax deferral of the account for the remainder of their lives. For example, if the owner of an IRA leaves the account to his 25 year old grandson, the grandson would be able to take only minimum distributions from the account, while the rest continued to grow tax free. Depending on the inheritor’s life expectancy, the tax deferral over the course of their life can equate to growth of seven to thirty times the value of the original account!
One of the proposed changes is to eliminate this stretch option and limit inheritors to tax deferral over a maximum of ten years. In other words, rather than taking only minimum required distributions and allowing the account to grow tax free over the course of their life, the inheritor must take distributions that would deplete the account within ten years.
This may cause some owners of large retirement accounts to plan differently knowing that their beneficiaries will not receive the same tax deferral. Some may consider doing a ROTH conversion where they convert their current IRA to a ROTH IRA over a period of time, slowly paying the income tax upfront. When their beneficiaries inherit the ROTH IRA, they would not be forced to deplete the account since the income tax has already been paid. Others may consider investing in life insurance to help offset the tax burden to the beneficiaries since life insurance proceeds are inherited income tax free.
While the SECURE Act is not yet law, it does force us to consider the estate planning and income tax implications if it does become law.You should review what options may be available to you to best preserve your retirement accounts with an estate planning attorney and financial advisor.