SECURE Act and Retirement Accounts – Make the Right Moves

Tax law is constantly changing.  Just when you thought you knew everything about the Tax Cuts and Jobs Act 2017, Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) in 2019.  Many changes are now in effect for individuals who inherit a 401(k) or an IRA.  Under previous tax law provisions, anyone who inherited a retirement account could generally withdraw the required minimum distributions (RMDs) over their lifetime.  Beginning in 2020, non-spouse beneficiaries of a 401(k) or an IRA who are less than 10 years younger than the deceased must deplete the inherited account within ten years after the account owner’s death.  This new law is particularly unfavorable to individuals who do not need their retirement money and want to leave it to their heirs.  It could result in retirement account beneficiaries having to use a good chunk of their inheritance to pay federal income tax.

There are a few opportunities to minimize the impact of this new law.  First, consider splitting your retirement accounts between your spouse and your children.  This will allow your children to have a second 10-year depletion period beginning with the date of the death of your spouse.
Second, consider converting any traditional taxable accounts into Roth accounts.  This will make the RMDs from the Roth accounts tax-free.
Third, check the language of retirement money that is left in a trust.  Specifically, make sure that the RMDs don’t result in a huge payout in the 10th year that will result in a large tax bill.

One positive note to the tax law change is that the minimum age to begin taking mandatory RMDs increased from 70 ½ to 72 years of age.  This gives and extra 1 ½ years to save and grow your retirement money.  Another positive result is that you can now continue to make contributions to a traditional retirement account after age 70 ½.  And, if you are an employee aged 72 or older and own less than 5% of the company you are working for, you don’t have to take RMDs until you retire. There is no age restriction for contributions to Roth retirement accounts and there are no RMDs.  

Note that minor children (not grandchildren) can extend RMDs until they are of legal age, or until age 26 if they are in school.  Spouses and disabled or chronically ill beneficiaries are exempt from the new requirements.

This is just one of the multitude of changes included in the SECURE Act.  Don’t delay planning for your retirement and your estate to minimize the impact of the unfavorable changes that affect you and your family.