If You Have a Large IRA, Beware: the Just-Passed SECURE Act May Have Created a Big Tax Bomb for Your Heirs - AgingOptions

It was a rare bi-partisan moment two months ago in Washington, DC, when the SECURE Act passed both House and Senate by a wide margin.This important piece of legislation, which took effect January 1, 2020, was the first major retirement-related legislation since the 2006 Pension Protection Act.In classic Washington-speak, SECURE is an acronym that stands for Setting Every Community Up for Retirement Enhancement, and it did in fact make some beneficial improvements to help more Americans save for retirement.The SECURE Act Generates Billions in New Tax Revenue from Your Beneficiaries!However, as this important Kiplinger article explains, the SECURE Act made some major changes that will affect people who plan to bequeath a large IRA to their heirs.

Written by wealth adviser Carlos Dias, Jr., the Kiplinger article warns that being complacent in the face of these new inheritance rules could cost your beneficiaries plenty.Dias explains that the law is designed to generate about $16 billion in tax revenue in the decade ahead, much of it directly related to the new IRA rules.In other words, your beneficiaries may be the ones who help pay that bill.As Dias writes, the SECURE Act means that previous advice your attorney, accountant and financial adviser gave you is most likely outdated or incorrect and a revision will be needed.

Those with IRA trusts will need to plan as soon as possible before the unexpected can and will go wrong.The SECURE Act Eliminates Most Stretch IRAs and Creates a Big Tax BombAccording to the Kiplinger article, Stretch IRAs have been popular for years as a way of reducing the tax bill when beneficiaries other than spouses inherit IRAs.The former rules allowed these beneficiaries to stretch out their required minimum distributions (RMDs) over their lifetimes, so that, by taking smaller annual payments, their tax burden was reduced.That provision has now changed with the SECURE Act, Dias writes.Spouses who inherit an IRA can still stretch withdrawals over their lifetimes, and a few other types of beneficiaries (referred to as eligible designated beneficiaries) still qualify, including some who are disabled or suffering a chronic illness.

Everyone else faces a dramatically different inheritance landscape.With beneficiaries who are not deemed eligible, says Dias, the retirement accounts will have to be depleted by the 10th year after the account owner passes.This change creates what Dias calls a Big Tax Bomb in Year 10.

(The SECURE Act also affects certain types of trusts known as conduit IRA trusts or pass-through trusts.We lack the space to explain the provisions here, so its imperative that you talk to a qualified financial adviser to ensure that youve planned for the new rules.)Before the SECURE Act, Beneficiaries Could Stretch Benefits for a LifetimeAs we read the Kiplinger article, we were amazed to compare the two RMD tables Dias prepared.We encourage you to click on the link and scroll down to see for yourself.

He lays out a common scenario: your non-spouse beneficiary, age 30, inherits your pre-tax IRA with a $500,000 balance.The account earns 3% each year.Before the passage of the SECURE Act, your heir would be required to make RMD withdrawals each year but could spread those withdrawals over his or her lifetime.The breakdown of withdrawals and balances calculated by Dias showed that your fortunate heir would be making gradually increasing withdrawals starting at $9,381 in Year 1 and building to $12,240 in Year 10.

RMDs would keep rising slowly, and the IRA balance would keep growing.After the SECURE Act, a Big Tax Surprise in Year 10But the table of RMD amounts with the passage of the SECURE Act, while looking pretty much the same for nine years, contains a ticking time bomb in Year 10.With the same scenario as above, for nine years RMD amounts range between $9,500 and $12,000.However, in Year 10, your heir will be required to withdraw and pay taxes on a whopping $540,335! The SECURE Act demands that the account be depleted within a decade of inheritance, and unless you plan carefully, Uncle Sam might suck up one-third or more of the IRA balance you had hoped your heirs would inherit.There are Options Under the SECURE Act, but You Need the Right AdviceOnce again, we lack the space to go into detail about some of the options you may choose to consider.

One recommendation involves starting now to gradually convert your IRA to a Roth IRA, which is not subject to RMD requirements.Dias also suggests you consider a Charitable Lead Trust or Charitable Remainder Trust to stretch the distribution period of your estate well past the ten-year mark.Some advisers recommend using certain forms of life insurance as a means of wealth transfer.

But these and other strategies can be complex, Dias warns, and should be affirmed by your attorney, accountant and financial adviser.One can easily misinterpret something [youve] read that will lead to a legal or tax nightmare.The Kiplinger article reinforces the power of objective professional advice.If youre ready to sit down with a qualified financial adviser, we hope youll get in touch with us at AgingOptions so we can recommend planners who will advise you with absolute integrity.

This would be a perfect time, no matter what size your estate, to have a planner create a personalized financial dashboard that will help you make all your money decisions with greater confidence.You Also Need the Right Advice to Plan for a Secure RetirementSpeaking of confidence, how self-assured are you feeling about retirement? If you enter this period of life without a comprehensive plan, youre in danger of losing your way depleting your assets and ending up being a burden to those you love.No one wants that! Instead, we invite you to join Rajiv Nagaich for a highly-entertaining, absolutely free retirement workshop called a LifePlanning Seminar where hell answer your questions and introduce you to a better approach, known as LifePlanning.Its possible to integrate all the elements of retirement into one seamless plan your money, your housing, your legal affairs, your family communication, and your medical care and Rajiv will show you how.

A LifePlan allows you to enjoy retirement with true confidence and peace of mind.Why not take the next step and put a LifePlanning Seminar on your calendar? All the dates of currently-scheduled seminars are here on our Live Events page, and you can sign up on line or by phone.It will be a pleasure to meet you at a seminar soon.Meanwhile, Age on!(originally reported at www.kiplinger.com)