How the SECURE Act Affects your Retirement Planning

The SECURE Act was signed into law in December of last year. It is the largest overhaul of the retirement system in over a decade. We read through the changes and outlined what retirees need to know to maximize their wealth given the new landscape. 

Roth IRA conversions are more appealing for early retirees.

A Roth conversion is when you move 401k or IRA money to a Roth IRA. This is a taxable event since 401k and IRA money is taxed when it is distributed, unlike Roth IRA money. If you will be in a lower tax bracket today than in the future, converting some money to a Roth IRA allows you to pay taxes now and increase the pot of money that can be distributed tax-free in the future.

Many early retirees find that they have very little taxable income at the beginning of their retirement because they delay taking social security and haven't reached the required minimum distribution (RMD) age yet. This short window of low taxable income is a great opportunity to do Roth conversions. Because the SECURE Act increased the RMD age from 70½ to 72 for those that were not age 70½ by the end of 2019, there is now an even larger window of time where Roth conversions can help you save taxes over the long-term.

If you plan to leave money to a non-spouse beneficiary, such as a child, converting money to a Roth may increase their inheritance.

In the past, a non-spouse IRA beneficiary could distribute money from an Inherited IRA over their lifetime. This was called the "stretch" provision. That was a great option because RMDs are taxable and spreading the income over many years could minimize the taxes due. The SECURE Act eliminated the stretch provision and now requires inherited 401k or IRA accounts to be empty by the 10th year after the account owner's death. There are no distributions required during those 10 years. If the beneficiary inherits a Roth IRA, the 10-year rule still applies, but the distributions will be tax-free.

Have your estate plan reviewed to confirm that your current strategy is still the best option given the new law.

Some aspects of the SECURE Act may invalidate the planning work that you did with your estate planning attorney. For example, some attorneys have used trusts as a vehicle to hold IRAs. This allowed them to enforce the old stretch IRA provision, which was optional. To prevent beneficiaries from spending their entire inheritance at once, money could be placed in a trust to ensure it was distributed in periodic payments and lasted longer. It also had the added benefit of creditor protection.

The SECURE Act eliminated RMDs for non-spouse beneficiaries. Therefore, if a trust states that the beneficiary only has access to the RMD each year, it may be interpreted to mean that the beneficiary receives no money in years 1 through 9 and the full distribution amount in year 10. That is not what the investor intended when they created the trust and it is likely not the best option to minimize taxes. There are exceptions for beneficiaries that still qualify for the stretch provision, so meet with your estate planning attorney to review your situation and determine if action is needed.

Think outside the box and be open to specialized vehicles that may fit your needs better.

A charitable remainder trust (CRT) can be a potential solution for investors that want to provide non-spouse beneficiaries with lifetime income that is protected from creditors. For example, you could name the CRT as the beneficiary of your 401k or IRA and name a child as the lifetime income beneficiary of the CRT. When you die, the money goes to the CRT and begins distributing money to the child. CRTs were created with charitable giving in mind, so when the child dies (or after a specific term stated in the CRT) the remaining balance goes to a named charity. This is just one example, but now is a great time to talk with your trusted professionals to be clear on all of your options, even ones that weren't on your radar before.

The passage of the SECURE Act is a reminder that financial planning is an ongoing process. While major laws and tax changes don’t happen every year, there are often new considerations and planning opportunities that have a finite window for you to take action. We can help you maximize your wealth, navigate through changes, and stay focused on what you are trying to accomplish.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.