Ways the SECURE Act Could Help, Hinder or Take a Big Bite Out of Clients

Ways the SECURE Act Could Help, Hinder or Take a Big Bite Out of Clients

The SECURE Act is now law and its implications are still being digested by financial professionals and clients.

The legislation has a threefold aim: make it easier for small employers to offer retirement plans; allow annuities to be added to 401(k) plans to improve retirement income; and change the RMD rules for qualified retirement plans. The RMD change is perhaps the most important for financial advisors to understand and explain to clients.

The first change doesn’t directly affect account holders, but may be deleterious for their heirs: the “stretch” IRA strategy is no longer allowed (with some caveats). The government’s aim is to increase tax revenues without harming the original account holder, but the beneficiaries of the latter’s largesse may not be pleased.

In the old system, inheritors of IRA or other retirement accounts could ‘stretch’ the RMDs over their lifespan. Under the SECURE Act, starting this year, heir-beneficiaries will have ten years, measured from the account holder’s demise, to withdraw all of the funds. Exceptions have been categorized, like the surviving spouse, underage children, people with disabilities and others, but most heirs will face a deadline and likely higher tax bills flowing from more aggressive RMDs and their impact on earned income.

The Act brings plenty of good news, too. Folks who work beyond the old boundary age of 70½, who previously were prohibited from contributing to traditional IRA accounts, can now make a deductible top-up totaling as much as $7,000 per year (couples can double that amount), depending on the particulars of the case.

The mandatory age for taking the first RMD has been changed: instead of the old barrier of 70½, the first RMD can now be delayed until 72. The Act contains one disappointment here: people who reached the magic age of 70½ in 2019 or previously must still follow the old rules, taking their first RMD at 70½. Those who reach the latter age this year and going forward can enjoy the benefits of the new rules – as usual, some win and others follow.

You’ll need to counsel clients on ways to respond to the SECURE Act. First, they should examine their financial plan and consider the list of beneficiaries. New rules call for new strategies: for example, leaving an IRA to a child to guarantee a lifetime income no longer works, suggesting a new beneficiary should be chosen and a different approach formulated to care for the child.

Some clients employ trusts as the beneficiary of their retirement accounts, with an heir designated to receive the RMD each year. In previous years, this provided the heir an annual income, while allowing the estate to enjoy the benefits attendant to trusts. Under the SECURE Act, this would happen: the RMDs would be parceled out for ten years and then frozen in the trust. After ten more years, all of the money would be released, suggesting a potentially sizeable tax problem for the recipient.

At issue is the federal government’s desire to rake in more tax income. You can’t blame them, perhaps, but you can certainly act to moderate the blow. A new tax mitigation scheme may be called for, for example, leaving a qualified retirement account to charity rather than to children. With the SECURE Act up and running, everyone with a retirement plan needs to conduct a tax review.

Roth IRA conversions are still a good way to help clients maximize their retirement income, limit taxes and protect heirs from the SECURE Act’s 10-year RMD limit. Indeed, this is an excellent time for everyone to examine the role RMDs play in their expected retirement income and the Act’s impact on any plan established under the old regime.

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For more information, please read:
Pros, Cons and Possible Disasters after SECURE Act | Kiplinger

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