Tuesday, May 26, 2020
On December 20, 2019, President Trump signed into law The Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Act has many provisions related to financial planning, with a focus on retirement planning with IRAs and employer-sponsored plans. One of the more attractive provisions under the Act is the curtailing of "stretched" inherited retirement assets.
Generally in a stretch arrangement, one spouse will retire with a retirement account, which would be tapped during their lifetime and the balance would then be left to a surviving spouse. The surviving spouse would then draw down the account and eventually leave what is left to their children or other beneficiaries. The ultimate heirs or beneficiaries would then have the opportunity to spread required minimum distributions (RMD) over their life expectancies, which could possibly lead to years of untaxed compounding and substantial wealth accumulation.
The SECURE Act eliminates the stretch for most beneficiaries, but keeps the opportunity intact for the plan participant's surviving spouse. Also, disabled and chronically ill beneficiaries can still take advantage of the stretch in regard to RMDs.
The IRS has just recently released new life expectancy tables for distributions beginning in 2021, which designated beneficiaries will be able to use. Compared to 2019, the life expectancy is longer, which means fewer RMDs each year, a potentially smaller tax on those RMDs, and more funds left in the IRA for continued compounding.
The SECURE Act applies to the retirement accounts of individuals who die in 2020 or later. The accounts of people who have died before 2020 will fall under the old rules until the beneficiary dies.
Under the SECURE Act, those planning for retirement have the opportunity to choose from a number of tactics to find what fits their financial scheme.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.