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The “Not So Secure” SECURE Act

JOURNAL & TOPICS

Journal & Topics Media Group | Serving Chicago’s Great Northwest Suburbs

THIS WAY TO WEALTH: published May 2020

by CHRIS EVERETT

The SECURE Act, enacted January 1, 2020 stands for Setting Every Community Up for Retirement Enhancement.  Sounds positive, right? 

PRO: You used to be forced out of your pre-tax accounts like IRAs, 401ks, TSPs, etc. when you were 70½ to take required minimum distributions, commonly referred to as RMDs.  That was either good or bad depending on your other income.  Now, you can wait until you are 72 before taking required minimum distributions. You have until April 1st following the year you turn 72.

This only applies if you turn 70 ½ in 2020 or later.  If you turned 70 ½ in 2019, you will not be able to delay until 72. And, if you turn 70 ½ in 2020 and are still working, you can make IRA contributions.  When you reach 72 though, and are still working, you will be required to take an RMD.  For example:  Lois is 72 in 2020 and working, earning $55,000 per year.  She has an IRA worth $400,000.  In 2020, she can make contributions of $7,000, but she is still required to take an RMD.

CON: Politicians are such master manipulators. According to https://usdebtclock.org/current-rates.html, As of  May 3, 2020 every tax payer owes $314k for their share of the U.S. public debt.

The SECURE Act is just a way to get your beneficiaries to give up more of their inheritance.  This should have been called:  The Way We Get More of Your Money And Don’t Care If It Impacts You Negatively Act. 

The stretch provision has been eliminated for non-spouse beneficiaries.  That means inherited pre-tax retirement accounts must be distributed within 10 years, instead of over the beneficiary’s life expectancy.  This change will likely increase taxes for beneficiaries since distributions from these accounts are taxed as ordinary income.

While there is no distribution requirement within those 10 years, giving some flexibility on timing of your distribution, be careful.  Remember, when you take the distribution, it’s taxable.  If you are a non-spousal beneficiary, you have several things to consider.  Your own income for one.  Those distributions are added to your regular taxable income.  If you inherit $500,000, and decide to spread your withdrawals over ten years, that’s an extra $50,000 of taxable income, not accounting for growth.  That will place most beneficiaries into a higher tax bracket. If you are parents of college bound students, that inheritance distribution may cause you to lose out on need-based financial aid.  On the bright side, if you inherit after you retire, it may be a welcome ten-year supplement. 

Some beneficiaries are excluded from the 10-year rule. Spouses are because a deceased spouse’s IRA becomes the property of the surviving spouse. If you are disabled or chronically ill, you can still stretch distributions over your lifetime.  If you are less than 10 years younger than the decedent, you can also stretch distributions. If you inherit the pre-tax account as a minor child, you can stretch distributions until you reach the age of majority, which in Illinois is 18.  Imagine an 18-year-old inheriting $500,000.   God help them.

Obviously, get good tax counsel and hire a fiduciary to help you mitigate the negative impact of The Secure Act on your family.  Yes, there’s help but you need to do some strategic planning.