New legislation making its way through Congress has the potential to create significant changes around retirement planning and individual retirement accounts (IRAs). The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House in May of 2019, but has been stalled in the Senate ever since (as of print, September 2019). However, analysts say it could find new momentum as part of one of several spending bills on the docket this fall.
Some proposed changes will affect all retirees, while others zero in on specific groups like part-time workers and new parents who want to use retirement funds to pay for birth and adoption expenses. There are several provisions that would impact wealthy families looking to maximize tax and estate planning strategies through retirement. And as with any legislation, there are plusses and minuses to these proposals.
Here are a few aspects of the SECURE Act that high-net-worth families should be aware of if the legislation passes in the Senate.
An Opportunity for Tax Savings with Required Minimum Distribution Requirements
One bright spot in the proposed law is a new rule that would shift the age for beginning Required Minimum Distributions (RMDs) from 70 ½ to 72 years old. This change creates an opportunity to rethink tax planning strategies, and it’s good news for families who don’t need to use their RMDs and can benefit from a few additional years without that taxable income. Clients have an extra year and a half before they have to start taking that taxable income and have the opportunity to plan accordingly by pulling from different assets or adjusting the details of stock option planning or deferred compensation payouts.
A Challenge for Leaving IRA Assets to Beneficiaries
The SECURE Act also includes some possible disheartening news for high-net-worth families looking to pass on a significant portion of their IRAs to subsequent generations. One provision would limit the time non-spouse beneficiaries have to collect distributions to 10 years after receiving an inheritance. Currently, individuals who inherit an IRA can distribute the assets during their lifetime and thus spread the tax impact over a longer time period. Often beneficiaries are able to collect after they retire and are in a lower tax bracket. If all distributions had to be made within a 10-year period, it would force more individuals to collect larger amounts while they’re still working, thus imposing on them a higher tax rate. In some cases, the distributions from these IRAs could push them into higher tax brackets.
A trusted advisor can act as a valuable partner in navigating these changes and ensuring assets are effectively shared over generations. In many cases, individuals have three places where their investment assets live:
Individuals and their advisors work together to decide in which order these assets should be spent in retirement and which should be passed on in estate planning. Right now, in most situations where it is unlikely that you will consume all of your assets during your lifetime, it makes sense to pass on the Roth IRA, followed by personal investment assets and then the traditional IRA (which has an embedded tax liability). If the 10-year distribution rule comes to pass, that strategy may need to be adjusted.
Navigating the New Rules – 2 Scenarios
Here are two different scenarios detailing how an advisor might help a family effectively plan for the proposed 10-year distribution change.
Planning that Ensures Prosperity over Generations
Wescott advisors are committed to staying on top of evolving legislation and regulations and utilizing the most effective planning strategies to sustain a family’s legacy. We focus on retirement planning that maximizes the impact of an individual’s assets not just for their golden years, but for generations to come. By working with this kind of trusted advisor, you can stay ahead of proposed legislation like the SECURE Act and know that whenever changes come, you’ll have a team to provide proper planning and peace of mind.
To learn more about effective retirement and estate planning, reach out to our team.