What is the SECURE Act?
There’s a piece of legislation in discussion widely in the news that will have major impacts on your retirement savings. The Setting Every Community Up for Retirement Enhancement (SECURE) Act is not only a reminder that our elected officials are great at coming up with acronyms, but it’s also a bill that has bipartisan support. It recently passed 417-3 in the house, and would do away with major tax benefits for the beneficiaries of your IRAs and 401(k)s.
SECURE Act Impact on RMDs
Currently, the IRS requires mandatory withdrawals from IRAs and most 401(k) plans at the age of 70 ½. These mandatory withdrawals are known as Required Minimum Distributions (RMDs). One provision in the bill some might call a win for retirees is moving the starting age for RMDs back to age 72. This may result in retirees paying less income taxes for a small window of time.
Annuity Options in 401(k)s
The bill that passed in the House also has a provision that would make it easier to add annuity investment options to 401(k) plans. There may be nothing inherently bad with annuities. However, they often come with greater cost and complexity than your typical mutual fund investments.
The Impact on Beneficiaries
The biggest provision in the bill would impact your beneficiaries far more than the previous provisions would impact yourself. At this time, designated beneficiaries of IRAs can benefit from something called a Stretch IRA. This technique allows the beneficiary to elect to take their own RMDs from the account depending on their life expectancy; instead of the requirement to empty the account within a 5-year window. The result of this technique are smaller annual withdrawals and, potentially, a lesser tax hit over their lifetime. The SECURE Act would eliminate the Stretch IRA and would require beneficiaries to withdrawal the IRA assets within a 10-year window of time.
SECURE Act Case Study on Beneficiaries
For example, an IRA owner born in 1950 dies in 2019 with an IRA balance of $500,000. The beneficiary is the deceased’s son, born in 1980. The beneficiary can elect to take required minimum distributions based on his lifetime. The first RMD will take place in 2020, and the beneficiary (now owner of an Inherited IRA) will be required to withdrawal $12,155.96. If the account continues to grow at 6%, the required withdrawals would not deplete the inherited IRA until the beneficiary is 83. In this case, the beneficiary, only taking required minimum distributions, was able to stretch the tax liabilities of the inherited IRA over his lifetime. Under the SECURE Act, the beneficiary would need to withdrawal the account by his age of 50, likely leading to larger withdrawals, potentially leading to greater tax liabilities.
It’s Not A Done Deal Just Yet
The bill still has a way to go before becoming a law. It’s uncertain what the Senate will do, and whether they will have their own provisions to add or change. The Senate will likely not address the bill until the fall, so this is something to keep an eye on in the coming months. If passed and signed into law in its current form, the SECURE Act will have major and long-lasting impacts on retirement accounts and estate planning.
If you have concerns on how the SECURE Act might impact your retirement plan, we’re here to help! Give us a call at 913-393-1000 or schedule a complimentary consultation below and someone from our team will contact you.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.