Advisory FAQ: Remember the Secure Act?

Sometimes a simple conversation among professionals can glean a helpful array of information. Here’s a conversation between John Wing, Founder of QA Wealth Management, and Christian Ray, CFP,  QA’s Director of Client Engagement, about the Secure Act legislation and some of its central provisions.

 

John:
Christian, the Secure Act was major legislation passed in December 2019. We are still getting quite a few questions regarding its provisions; any thoughts on why?

Christian:
Like a lot of things, the Secure Act news was lost in the global pandemic. However, there are some very important elements of the Secure Act that affect our clients, so it’s a good time to review them.

 

John:
What were the main objectives of the Secure Act?

Christian:
Like most legislation, there were a lot of items covered, but two central matters were changes to the required minimum distribution ( RMD) age, and significant changes regarding the beneficiaries of IRAs.

 

John: 
Let’s start with RMDs. What was the change?

Christian:
This change is straightforward. Historically, IRA owners had to take required minimum distributions every year starting at age 70.5. The Secure Act pushed this back to age 72, which by default allows the IRA owner to defer taxes longer than in the past.

 

John:
Sounds like a good thing, is there a catch?

Christian:
Well, yes, and a significant one when you look at the details. Under existing rules, an IRA owner can pass their plan to a spouse (or other eligible designated beneficiary), and the beneficiary can “stretch” the distributions over their lifetime. This is a great benefit as it allows them to pay taxes over a long period of time, allowing for greater tax deferred growth. However, this advantage was eliminated for other beneficiaries, generally including children and grandchildren, who are very often set as IRA beneficiaries for tax and estate purposes.

 

John:
So, what is the implication?

Christian:
Eliminating the “stretch” of IRA distributions over the life of the child or grandchild shortens the period over which the beneficiary must take distributions from the IRA, accelerating the income (and therefore taxation) over no more than 10 years. Unfortunately, a lot of parents and grandparents built their financial and estate plans to take advantage of the former “stretch” provision, and are now having to review and potentially unwind and rebuild part of their plan.

 

John:
Are there any solutions that can help mitigate this change?

Christian:
Yes, there are several. While a client and their children or grandchildren generally can’t take advantage of the stretch provision any longer, they can look at a few options for using Roth 401k and Roth IRAs to help manage the acceleration of tax liability. It gets a bit complicated and depends on the particular situation of the client, but potentially contributing or converting traditional 401k and IRA dollars to Roth options can help manage taxes on the front end and reduce some of the tax implications to the beneficiaries. One helpful non-change to existing rules was the provision associated with the start date for Qualified Charitable Distributions (QCDs). Through QCDs, individuals can take advantage of gifting out of IRAs to charities while also satisfying their RMD requirement. Oddly enough, individuals can still start this charitable giving from their IRAs beginning at age 70.5, while the RMD age itself has been pushed back to 72. That can help manage these changes for those who are already charitably minded or would like to consider gifts to non-profits on a tax-advantaged basis.

 

John:
Sounds like clients need to understand this. What’s the next step?

Christian:
It is important to review these Secure Act changes in light of a client’s current financial and estate plans, either with their attorney, CPA or advisor. We are having a lot of discussions with clients about this topic and can help them understand the issues, run new planning scenarios, and make recommendations.

 

John:
Thanks, Christian.

 

Meet with your advisor or contact us today to talk about how the Secure Act legislation could affect you.

 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

 

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