The SECURE Act: What Does it Mean for the Affluent and Their Retirement?
In December 2019, both chambers of Congress voted to pass the Setting Every Community Up for Retirement Enhancement Act. The SECURE Act, as it is commonly known, was enacted shortly after when it was signed into law by the president. The SECURE Act represents the most comprehensive piece of retirement legislation passed since 2006, and it will likely affect the way you live in, or plan for, retirement.
The stated goal of the new law is to make saving for retirement easier and more accessible for all. Unsurprisingly, its implications will affect different people in different ways, depending on their overall financial picture. So, what changes resulting from this new law do high-net-worth (HNW) individuals and their families need to consider? Let's take a look at a handful of the most significant changes for the affluent.
The Death of the Stretch IRA: 10-Year Required Withdrawal Timeline From Inherited Retirement Accounts
The SECURE Act put an end to the "stretch" IRA in perhaps the most important change for HNW individuals and families. The stretch IRA was a popular estate-planning strategy that allowed HNW families to strive to maintain generational wealth by naming the youngest member of their family as the beneficiary of an IRA. This strategy allowed them to "stretch" the life and tax advantages of the inherited account potentially for decades after the original account owner had died.
Under the new law, beneficiaries who have inherited a retirement account will be required to withdraw the entire amount within 10 years. There's a strong likelihood that the beneficiary's tax obligation will go up because they are required to withdraw larger amounts from the account over a shorter period of time. This change may prove particularly costly for inheritors in their 40s and 50s and in their peak earning years because distributions are treated and taxed as income.
Certain groups of people are exempt from this rule. They include:
- Spouses of the deceased.
- Beneficiaries who are disabled or chronically ill.
- Certain minors (children of the original retirement account owner), but only until they reach the age of majority. In Colorado, that's 18.
- Individuals, such as a sibling, who are no more than 10 years younger than the decedent. 
It is important to note that IRAs inherited before December 31, 2019, can keep their "stretch" status. If you used this strategy in your estate planning, consult our team of financial professionals and your estate-planning professional to ensure you comply with new rules and formulate a new strategy. It may make sense for you to do a partial conversion to a Roth IRA, which could limit the tax burden on your beneficiary when they are forced to begin withdrawing from the inherited account after the "10-year rule" kicks in.
The Required Minimum Distribution (RMD) Age Is Now 72
Previously, when you reached age 70½, you were forced to begin taking RMDs from traditional IRAs and 401(k)s. The SECURE Act raised this age to 72, meaning you have until April 1 of the year after the year you turn 72 to take your first RMD. This change affects individuals born on, or after, July 1, 1949. Anyone born before that date must start and/or continue taking RMDs at age 70½.
This seemingly small change of just 1½ years can have significant planning implications. For starters, it allows your retirement accounts to mature and potentially gain value for an additional year and a half before you are forced to start withdrawing your savings and paying associated taxes. Raising the RMD age gives retirees who are not earning a wage more time to take advantage of their lower income-tax status.
Talk to your tax professional and our team about whether it makes sense for you to increase your IRA distributions or implement Roth IRA conversions in the years between your retirement and when you turn 72. The tax savings are potentially significant, and it could also lower the amount of your future RMDs.
No More Age Limits On Contributing To Traditional IRAs
Previously, individuals could no longer contribute to traditional IRAs once they reached 70½. The SECURE Act has eliminated that age cap, allowing people to continue contributing to traditional IRAs for as long as they keep working.
This change is great news if you hope to continue working into your 70s. As more Americans 55 and older make up a significant portion of the workforce, this change could make a substantial impact on their retirement savings. Today, 23.1 percent of the workforce consists of those 55 and older, compared with just 18.1 percent in 2008. And according to the U.S. Census Bureau, that percentage is projected to continue increasing to 25 percent by 2028.
Talk It Over With Your Advisors
Because of the many nuances of individual situations and the complexity of the tax code, we highly recommend coordinating with your accountant, tax professional, or estate attorney when considering changing your financial plan. We are happy to serve as your financial quarterback and confer jointly with you and your other trusted professionals on what makes sense for you.