If you have been following the financial news lately, you may have heard about the new SECURE Act signed into law at the end of 2019. For those of you planning for the future, the SECURE Act is a significant piece of legislation, and it is expected to have a far-reaching impact on retirement savings for millions of Americans. And depending on your strategy, the new SECURE Act could impact your financial legacy in a big way.
So far, most have praised the positive aspects of the law. But while the SECURE Act is well intentioned, it does have some elements that could have a negative impact on your retirement savings if you aren’t prepared.
Our goal at INTELUS Wealth Management is to assist our clients to create, build, and protect their financial legacy. For many of our clients, this new legislation will present a challenge in protecting their legacy if certain areas are not addressed.
What Is the SECURE Act?
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) of 2019 was signed into law on December 20, 2019, as part of a bigger package of year-end appropriations and tax measures. The stated purpose of the bill is to increase access to tax-advantaged accounts and help older Americans who may be in danger of outliving their assets. It is hoped the law will help more workers save more dollars for their retirement.
Here are some of the key features of the SECURE Act:
● Makes it easier for small business owners to set up certain “safe harbor” retirement plans.
● Allows 401(k) plans to more easily offer annuities.
● Extends eligibility for employer retirement plans to many part-time workers.
● Pushes back the age you need to start taking required minimum distributions (RMDs) from 70.5 to 72 years old.
● Allows traditional IRA owners to continue making contributions to their accounts indefinitely.
● Ends the “Stretch” IRA provision and mandates that most non-spouse beneficiaries inheriting IRAs in 2020 and later now empty the account within 10 years of the death of the original account holder.
While many of these provisions may benefit individuals preparing for retirement, it is the elimination of the Stretch IRA that will cause issues for many as they seek to protect a financial legacy for their next generation.
Where Do You Have Your Assets?
The potential of the SECURE Act to impact your retirement savings and your legacy really comes down to this question: Where do you have your assets? As a planner, I work with clients who have built their wealth in several ways. And in terms of this new law, I’m thinking of two types of clients in particular.
● First, there are the individuals and families with assets between $1–5 million. They are well off, but from my time in the business I have found they often don’t feel wealthy. Most of these clients have built a significant portion of their net worth (potentially as much as 60–90%) in their retirement plans and IRAs.
● Second, there’s a wealthier group of individuals and families with assets above $5 million. These folks may have much of their savings in an IRA, however the bulk of their net worth tends to be in other assets, such as real estate, stocks, and/or businesses.
Both groups are preparing to leave a legacy for the next generation, but with the passage of the new SECURE Act, the second, wealthier group now has a distinct advantage in passing on their legacy.
Why Does Asset Location Matter for Legacy?
Upon death, many get to leave assets such as real estate and stocks to heirs on a “step-up in basis.” This means that the market value of those assets at the time of inheritance is what is considered for tax purposes upon sale. Thus, it minimizes their beneficiary’s capital gains tax and helps them protect their legacy. Here is an example for real estate:
● If I bought a piece of real estate years ago for $50,000 and I sell it when it is worth $150,000, then I would pay capital gains tax on that increased value of $100,000. But if I die and my children inherit the property and then immediately sell it when it is worth $150,000, the same tax would not apply, because of what’s called “step-up” in basis.
The same step-up in basis readjustment can also reflect the change in value of an inherited stock:
● If I bought Stock A when it was worth $1 per share and I sell it when it is worth $5 per share, then I would pay capital gains tax on that increased value of $4. However, if I die and leave it as a legacy when it is worth $5 per share and my heirs sell it for this price, then they don’t pay tax on the $4 per share in gain.
For business owners, there are also several planning strategies available that can help them pass on a legacy at death of business assets with minimum taxation.
Yet whether you have structured your portfolio with assets in real estate, stocks, or business assets, you get to pass on these assets in a tax-favored manner to the next generation. With the SECURE Act, this fact remains the same. However, for those who have most of their assets elsewhere, such as in 401k retirement plans and IRAs, the SECURE Act passage brings significant changes.
How Does the SECURE Act Impact 401k and IRA Holders?
Before the SECURE Act, non-spouse beneficiaries could take advantage of what was called the “Stretch” IRA strategy with their retirement savings.
Basically, children of 401k and IRA holders often had an opportunity to stretch out the required distributions over their own lifetime, often times allowing them to take a smaller amount at each distribution. This feature could lower the taxes paid on the IRA and allowed the beneficiary to retain the asset in tax-deferred status, possibly until their own retirement.
But this provision was ended by the new SECURE Act, meaning you can’t stretch out distributions like this anymore. Under the new SECURE Act, your non-spouse beneficiaries will have 10 years to withdraw all the funds from the inherited IRA account. This change applies to all IRAs inherited after December 31, 2019, and under the new rule, a non-spouse beneficiary will have much less flexibility in how they take their disbursements.
Consider the tax implications for a $1 million IRA:
● Imagine in year 10, your child withdraws all the funds, which with potential returns and interest, might total $1.5 million, while also earning household income of $250,000. These assets would be taxed at about 35–40%, creating a tax burden of about $750,000, leading to an incredible shrinkage from the original legacy you planned to leave.
This will be a concern for many Americans who have the majority of their wealth in 401ks and IRAs. For many of my clients this is a problem they have to address.
What to Make of the Changes?
Like many, I still have questions about why this change was made. It has been said the elimination of the stretch IRA provision was needed to make the advantages of the SECURE Act revenue neutral. However, it feels as if the burden has been placed disproportionately on the working-class savers whose desire is to leave an inheritance for their children.
It is unclear why the government took this action, considering past legislation over the years focus intently on lowering the amount of tax on inheritance for the wealthy. Both the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Tax Cuts and Jobs Act of 2017 significantly reduced the number of households that will pay estate tax upon death for wealthy families. Both laws were enacted in spite of the reported negative impact on the budget deficit.
So, I think it is important to ask why Congress felt that increasing the level of taxation for the beneficiaries of Middle America savers is necessary, given that the wealthier owners of other assets get to pass assets on tax free.
How Can You Better Protect Your Legacy?
Now we see both branches of government appear to be placing a heavier tax burden on non-spouse beneficiaries of modest estates concentrated in qualified plans. Fortunately, there are steps one can take to reduce the impact of shrinkage in your estate:
● Consider contributing more to a Roth IRA or Roth 401K. Based on current tax law, each of these allow tax-free distributions for the owners after age 59.5 and for non-spousal beneficiaries at death.
● Consider shifting existing funds to a Roth IRA, called a Roth conversion. Conversions are taxed now, but afterwards have the same benefits as the Roth IRAs discussed previously.
● Consider using IRA/401k distributions after 59.5 and RMDs to purchase life insurance. Life insurance proceeds are tax free to beneficiaries. This can be left to help pay the taxes incurred on the new distribution requirements for non-spousal beneficiaries under the SECURE ACT.
It can be confusing when new legislation is enacted, but it’s important to stay on top of these changes and think proactively about your saving and investment strategy. Contact your advisor to ensure that you are prepared to protect your legacy and your financial future.

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