The SECURE Act: Congress spins “Taxman” for next generation

When our girls were babies, I’d whisper The Beatles “Yellow Submarine” as a lullaby. Thanks to the SECURE Act, Congress has ensured they, along with your kids and grandkids, will seek another Revolver track, “Taxman”. 

In May, the House voted 417-3 for the SECURE Act with the promise of: “Setting Every Community Up for Retirement Enhancement”. The Senate delayed, then attached unchanged to the 2020 budget, which was overwhelmingly passed to keep the government running.  

There are new features for those in specific situations, however I wish to focus on the impact to be felt the broadest, taxation. 

Inherited “Stretch” IRAs eliminated for kids and grandkids.

Prior to SECURE Act, non-spouse designated beneficiaries (i.e. kids or grandkids) could inherit a Traditional IRA, take distributions over their life expectancy and taxed as earned income. If Roth IRA, the beneficiary could choose to take nothing until needed and pay no taxes. Meaning a 25 year-old inherits Roth IRA, takes nothing until age 75 and pays no taxes on 50 years of growth.

With SECURE Act, Congress utilized their “power to lay and collect taxes” by instituting the 10-Year Rule. For retirement account owners who pass away in 2020 and beyond, most non-spousal beneficiaries have 10 years to empty the account. Today, 25 year-old inherits Roth IRA, it is closed by age 35 and assets are exposed to constant taxation and fatuous spending.  

The 10-Year Rule eliminates waiting for taxes from Traditional IRAs, forces assets out of Roth IRAs and discards parents and grandparents who sacrificed, saved and planned to help secure a better retirement for their next generation. 

What can be done?

Parents and grandparents consider:

  • Conversations with heirs about strategies in place and expectations.  

  • Reviewing beneficiaries, as certain types of ‘see-through’ trusts may no longer be able to make annual distributions to the trust under the new rules, resulting in lump-sum liquidation in 10th year and significant tax liability. 

  • Evaluating Roth conversions over time, which may ease tax burden to heirs.

Adult children consider:

  • Developing strategy on timing of inherited IRA distributions based on your tax situation.

  • Conversations with parents who intend to leave you or your kids inherited IRAs. 

Remember, the 10-Year Rule is just one aspect of new legislation on retirement policies. Speak with your advisor or Certified Financial Planner on how the SECURE Act impacts you and your family. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.

This article appeared in the February editions of Holliston Local Town Pages, Ashland Local Town Pages and Natick Local Town Pages.

Please call me at (508) 834-7733 or directly schedule a meeting to learn more about considerations for planning and investing so you can balance kids, aging parents and your financial independence.

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