New legislation making its way through Congress has the potential to create significant changes around retirement planning and individual retirement accounts (IRAs). The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House in May of 2019, but has been stalled in the Senate ever since (as of the end of October 2019). However, analysts say it could find new momentum as part of one of several spending bills on the docket this fall.
SEE ALSO: How to Buy Out Your Retirement ‘Business Partner’ – with a Roth Conversion
Some proposed changes will affect all retirees, while others zero in on specific groups like part-time workers and new parents who want to use retirement funds to pay for birth and adoption expenses. There are several provisions that would impact wealthy families looking to maximize tax and estate planning strategies through retirement. And as with any legislation, there are plusses and minuses to these proposals.
Here are a few aspects of the SECURE Act that high-net-worth families should be aware of if the legislation passes in the Senate.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
An Opportunity for Tax Savings with Required Minimum Distribution Requirements
One bright spot in the proposed law is a new rule that would shift the age for beginning Required Minimum Distributions (RMDs) from 70½ to 72 years old. This change creates an opportunity to rethink tax planning strategies, and it’s good news for families who don’t need to use their RMDs and can benefit from a few additional years without that taxable income. Clients have an extra year and a half before they have to start taking that taxable income and have the opportunity to plan accordingly by pulling from different assets or adjusting the details of stock option planning or deferred compensation payouts.
A Challenge for Leaving IRA Assets to Beneficiaries
The SECURE Act also includes some possible disheartening news for high-net-worth families looking to pass on a significant portion of their IRAs to subsequent generations. One provision would limit the time non-spouse beneficiaries have to collect distributions to 10 years after receiving an inheritance. Currently, individuals who inherit an IRA can distribute the assets during their lifetime and thus spread the tax impact over a longer time period. Often beneficiaries are able to collect after they retire and are in a lower tax bracket. If all distributions had to be made within a 10-year period, it would force more individuals to collect larger amounts while they’re still working, thus imposing on them a higher tax rate. In some cases, the distributions from these IRAs could push them into higher tax brackets.
A trusted adviser can act as a valuable partner in navigating these changes and ensuring assets are effectively shared over generations. In many cases, individuals have three places where their investment assets live:
- Roth IRAs
- Traditional IRAs
- Personal investment accounts
Individuals and their advisers work together to decide in which order these assets should be spent in retirement and which should be passed on in estate planning. Right now, in most situations where it is unlikely that you will consume all of your assets during your lifetime, it makes sense to pass on the Roth IRA, followed by personal investment assets and then the traditional IRA (which has an embedded tax liability). If the 10-year distribution rule comes to pass, that strategy may need to be adjusted.
See Also: Which Bucket Should Retirees Tap First, for Their Heirs' Sake?
Navigating the New Rules – 2 Scenarios
Here are two scenarios detailing how an adviser might help a family effectively plan for the proposed 10-year distribution change.
- Scenario No. 1: The parents are in their late 70s with a child in her early 50s. The child is in the highest tax bracket and plans to continue working for the next 10-plus years. If the child were to inherit an IRA from her parents, she would have to distribute the assets over the next 10 years at the highest tax rate. Instead, an adviser recommends a different strategy. Because the parents are retired and in a lower tax bracket, they can take the distributions over a period of years (or initiate a Roth IRA conversion strategy) and pay the taxes themselves, at their lower tax rate. They can then shift the assets into personal investment accounts (or a Roth IRA) that will be incorporated into a broader estate planning strategy.
- Scenario No. 2: Again, consider parents in their late 70s with a high-earning child in her early 50s. The child does not anticipate needing that money during her lifetime. In this case, an adviser suggests her parents name a grandchild as a beneficiary. The grandchild would still have to take the distribution over 10 years, but the tax impact would be lower since he is earning less money.
Planning that Ensures Prosperity over Generations
Responsible financial advisers are committed to staying on top of evolving legislation and regulations and utilizing the most effective planning strategies to sustain a family’s legacy. We focus on retirement planning that maximizes the impact of an individual’s assets not just for their golden years, but for generations to come. By working with this kind of trusted adviser, you can stay ahead of proposed legislation like the SECURE Act and know that whenever changes come, you’ll have a team to provide proper planning and peace of mind.
See Also: Critical Choices for IRA Beneficiaries
-
The Most Popular Apps for Retirement Planning in 2025A J.D. Power survey ranks retirement planning apps based on customer service and satisfaction. Does your financial app make the cut?
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms
Standard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
