Byline: Michael J. Simolo
The SECURE Act, which was signed into law in December of last year, has significant estate planning implications that will likely result in much higher income tax bills for beneficiaries of these accounts. This blog entry will begin to outline those implications.
Generally speaking, the best advice surrounding tax-deferred retirement accounts (such as IRAs, 401(k)s, and 403(b) accounts) is to leave assets in those accounts for as long as possible. This allows the assets to grow tax-free. Nothing good lasts forever, though, and, at some point, all retirement account owners must begin taking their required minimum distributions (RMDs)—namely, a forced distribution from the account. Prior to the Secure Act, participants had to begin taking their RMDs in the year they turned 70½. After the Secure Act, participants can wait until they reach age 72 to begin taking those distributions.
Prior to the Secure Act, tax-deferred retirement accounts could obtain another generation of tax-deferred growth by naming a participant’s children, or a properly drafted trust for the children’s benefit, as the beneficiary. Each child/beneficiary—or each trust for a child’s benefit—would be required to take RMDs based on the age of the child (or even grandchild) at the time of the participant’s death. This resulted in another full generation (or two!) of the tax-free growth for the account.
Unfortunately, the Secure Act has eliminated the second-generation lifetime payout in favor of a straight 10-year payout rule. With certain exceptions (we’ll discuss those in the next entry), every non-spouse beneficiary of a retirement account must withdraw all funds in the account and pay all resulting tax by December 31 of the year that contains the 10th anniversary of the participant’s date of death. There need not be any interim distributions during this period—the only requirement is that all funds be distributed before the end of the 10 year period.
This change has sent shockwaves through the retirement planning community. New strategies need to be considered and implemented. What was once a “slam dunk” now looks substantially less beneficial.