UnSECURE: A potential new law puts the squeeze on your stretch (IRA)

By HMA Team on August 22, 2019

This spring, the U.S. House of Representatives approved the SECURE Act with a 417-3 vote. While the bill has yet to pass in the Senate, we feel it’s crucial to begin the conversation with our clients regarding changes which will be enacted if the bill becomes law. These changes have big consequences for common aspects of retirement and estate planning. We’re writing this piece so you won’t be caught off guard and can start taking steps to rectify your plan immediately in the event the SECURE Act is passed.

As you are likely aware, multi-generational wealth planning is a cornerstone of our practice. The passage of the SECURE Act will alter our ability to use these vessels to help achieve your goals. Changes will need to be made to your existing plan, and we will need to approach things a bit differently.

As it is currently written, the proposed SECURE Act would eliminate the ability for most beneficiaries to withdraw an inherited IRA over the course of their lifetime. This “stretch” provision allows for the slow drawdown of funds, keeping a lid on yearly taxable income for your beneficiary. With the new law, only “eligible designation beneficiaries” such as spouses, minor children, or the disabled would be allowed to take withdrawals over their lifetime. All other beneficiaries must draw down the balance within 10 years. If you are concerned about tax minimization for your beneficiary, the stretch IRA will no longer be a feasible option. Rules regarding conduit and discretionary trusts and Trusteed IRAs would also be affected. In addition, the SECURE Act contains provisions that would change the 70.5 age rules surrounding required minimum distributions and contributions.

We have an arsenal of solutions at hand to overcome the hurdles created by this possible legislative shift. Possible options include carefully timed Roth conversions during your lifetime, various tax bracket management strategies, and the use of charitable remainder trusts. First and foremost, we recommend a thorough review of your beneficiaries and the anticipated payout periods for each under the current and proposed new laws.

As advisors in multi-generational wealth planning, it’s important to us to be on top of possible changes to laws which might impact your carefully laid plans. In preparation, we recommend you set up a time to sit down with us to review your beneficiary designations and withdrawal strategies for your IRA. We hope to see you soon!