The SECURE Act

Changes to Required Minimum Distributions

There are a couple of key changes to Required Minimum Distributions (RMDs) that were instated as of the beginning of this year, drastically affecting how inherited retirement accounts are dispersed to the original owner’s heir as well as increasing the age at which an individual is forced to begin withdrawing from their retirement accounts.

Changes to Age Requirement

One of the more interesting changes the SECURE Act makes is changing the age at which those with retirement accounts are required to begin pulling Required Minimum Distributions (RMDs) from their retirement fund, from age 70.5 to age 72. This change can help to give account owners more time for their accounts to grow while simultaneously giving them a bit more time to figure out how they want to utilize it. This is great for those who are not struggling financially and have the ability to take a step back and see what the best long-term financial planning strategy will benefit them most.

The downside to choosing to delay these RMDs is that, with the opportunity to increase the value of these accounts by allowing them to accrue interest for 18 months after they would originally be subject to RMDs, these minimum deposits will be larger, perhaps substantially so. This can have effects on taxes and bills based on what your income is, such as certain Medicare premiums that may increase as your monthly distributions become higher. Considering the SECURE Act begins on the 1st of the year in 2020, this increase from 70.5 to 72 is only subject to those who have not already turned 70.5 before January 1st, 2020.

Changes to the RMD “Stretch” Estate Planning Strategy

The primary changes that the SECURE Act makes to RMDs are changes to the stretch option of inherited retirement accounts. The stretch option — or the ability to offer a tax-friendly inheritance plan by “stretching” payments of a retirement account to the beneficiary upon the death of the original owner — is being eliminated, and is no longer a viable estate planning strategy for non-exempted individuals (see the list below).

The stretch strategy for RMDs for accounts inherited from pension account owners who passed away before 12/31/2019 will remain unaffected; the changes to the inheritance portion of the law occurred on 1/1/2020, and as such will only impact those who inherited accounts from those who passed away on or after that date.

In lieu of a stretch plan allowing dispersals from retirement plans to be passed out to the heir over the course of their lifetime, the entirety of the inherited IRA or defined contribution plan must be paid out within 10 years of the death of the account’s original owner.

In special circumstances, beneficiaries may be exempt from this 10-year requirement. It is still a valid estate planning solution for:

  • Surviving spouses
  • Account inheritors less than 10 years younger than the decedent
  • Beneficiaries with chronic illnesses or disabilities
  • Minors, until they reach the age of majority threshold (between 18 and 21, depending on the state), after which their exception will expire and they will be required to adhere to the 10-year plan unless they fall into another category of exempt heirs.

Does the SECURE Act Apply to My Financial Planning Strategy?

While the answer is “probably”, we urge you to contact us today to find out for sure. If you are affected by the SECURE Act, your financial planning strategy may require alteration, including a plan to deal with any escalations in tax brackets that may result from later and higher RMD withdrawals, and the 10-year requirement for inherited accounts.

Our desire at the West Advisory Group is that we can work together to get you to a place where you understand the right moves for you and feel confident in your financial planning strategy.