Prepare for the SECURE Act

This has been under the radar for most folks, but be prepared. Last month, the U.S. House of Representatives passed the SECURE Act, a bill to change the laws on retirement savings. The U.S. Senate has taken up a similar bill, but it has not passed yet. After that, the two bodies have to get their laws to match up and have the President sign the bill. We’re still not there yet.

However, what you should know is that the law would significantly damage the ability for many folks to take their inherited IRA and turn it into a “Stretch IRA.” The Stretch IRA is a technique that allows a beneficiary of an IRA to take distributions over his or her lifetime. By “stretching” out the distributions, you also stretch out the tax obligation, and allow the account to compound and grow much more significantly. 

A number of clients have created IRA Trusts or Retirement Planning Trusts to make sure their heirs preserve the stretch option rather than taking a lump sum distribution. Remember, for many folks, their retirement assets may be the most significant part of their estate. They have saved for years, the money has grown, and they plan to only take required distributions out. For many, they have seen this as a ticket to a multi-generational legacy. 

If this legislation becomes law, we will have to revisit IRA Trust planning and take a careful look at existing trusts. There may be new planning opportunities and alternative solutions, but we first need to evaluate the law once it is official. Until then, I suggest sitting tight.

According to my dad, Peter Wechsler of Franklin Retirement Solutions, “Another big change in the bill would raise the age at which seniors are required to take required minimum distributions (RMDs) from retirement accounts to age 72 from 70½. I have many clients who will applaud this change as they hate pulling money out of IRAs if it’s not needed and having to pay the taxes. Any pushback on that 70 ½ number will be loved by many.” Furthermore, he writes that “many will cheer as the bill also eliminates the existing cutoff of age 70½ by allowing workers of any age to contribute to traditional IRAs. In other words, as long as you are fogging a mirror, you can add to your IRA each year with no age limit.”

Stay tuned — We’ll do our best to keep you updated on this changing situation. As of now, there is nothing you should do or change. *If* the law passes (and depending on what the language that is signed into law says), we will have more detailed insights and develop alternative solutions.