In December 2019, the SECURE Act was passed by Congress and signed into law, implementing some big changes to America's retirement planning system. One of the primary goals of the new law is to make it easier for workers to save for retirement, but it also presents significant impacts for some current and future retirees, as well as for some people's estate plans.
People who have already accumulated a substantial level of wealth in qualified retirement accounts might need to revisit their estate planning strategies and adjust their estate plans to help protect their heirs from unexpected tax bills. Getting financial guidance during this time is critical to ensure your estate plans stay on track.
Learn more about how this law affects your financial future, and how to adjust to the new rules.
How does the SECURE Act affect estate planning?
Retirement accounts make up the largest share of many Americans' net worth, so it's important to have an estate plan for these accounts, especially under the SECURE Act. One of the SECURE Act's biggest impacts on estate planning is in the tax treatment of "Stretch IRAs."
Before this legislation, the rules for required minimum distributions (RMDs) from retirement accounts allowed non-spouse beneficiaries of IRAs and defined contribution accounts to take distributions across their full life expectancies. This is also known as "stretching" the account, or using a "Stretch IRA."
By allowing more gradual withdrawals from these accounts, beneficiaries could potentially reduce their taxable income in any given year, and/or defer taxes further into the future.
Under the SECURE Act, with some limited exceptions, certain people who are non-spousal beneficiaries of IRAs and defined contribution plans are required to completely withdraw the money in their inherited accounts within 10 years.
This means: If you want to leave a retirement account to a non-spouse beneficiary, they might be forced to withdraw the money in that account sooner than they would have preferred, which could cause them to owe a higher tax bill than they had expected.