SECURE Act and Your Retirement Account

I would not associate the word SECURE with year 2020. So, it is a bit ironic that 2020 did bring us the SECURE Act. This Act is all about your retirement funds or what is left of it given the surprises of 2020. Setting Every Community Up for Retirement Enhancement (SECURE) eliminates the stretch provision for certain persons who will inherit the balance of your account at death.

Prior to the SECURE Act. When a child inherited a traditional IRA from his parent, he could take distributions over his life expectancy. Distributions equate to taxable income. If it was a large IRA, say $1,000,000, the ability to stretch out the distributions over this long period of time was a great benefit to manage and minimize annual taxable income.

Now with the SECURE Act. The same child that who now inherits a traditional IRA of $1,000,000, only has 10 years to “cash out” the entire account. This requires that the child consider his own taxable income, make projections, and develop a plan for depletion of the account within that time. Equal distributions of a static $1,000,000 would be at least an additional $80,000 per year in taxable income and that does not account for any growth. The ten-year deadline is really December 31 of the year that is the 10th anniversary of the death of the original account owner.

Exceptions to 10-Year Distribution. “Eligible Designated Beneficiaries” still get a lifetime stretch and are not subject to the new 10-year rule. Persons in this category include: 1) surviving spouse of the IRA owner; 2) a disabled individual; 3) a chronically ill individual; 4) a minor child (10-year rule starts at age o of majority); and 5) an individual who is not more than 10 years younger than the IRA owner.

Your Living Trust. There are many reasons that you may have named your trust as beneficiary of your retirement account. If you have done this, you need to contact your attorney to understand how the SECURE Act will impact the distribution provisions in your trust and what planning options exist. Your trust will very likely need to be modified to accommodate the changes brought by the SECURE Act and it is important for you to understand how it impacts your goals of passing those funds on.

Please contact us for your estate planning needs including a discussion on how SECURE impacts you and your loved ones.

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