1. A Big Shrug, or Not
It's a change that could be categorized any place between significant and almost a non-event. It depends on the client's goals and objectives relating to inheritance, philanthropy, and tax sensitivity. The removal of the stretch [IRA] provision means assets from heirs going to taxes, and at a significantly compressed time table and potentially at higher tax rates. Conversations with clients have all been quite different. One client reacted with a shoulder shrug while another wanted to dive right into estate planning strategies involving the use of charitable remainder trusts. —
Rob Greenman, CFP, Vista Capital Partners, Portland, Oregon
2. Good With the Bad
While the Secure Act provides some benefit if you are not yet taking RMDs, long term it means less generational wealth will be retained and more will go to taxes. Tax-deferred accounts like IRAs are where most Americans hold their invested assets. Requiring mandatory distribution over 10 years for inherited IRAs for non-spouses will effectively increase tax on these accounts. Adding these distributions to the beneficiary’s taxable income means they will end up in a higher tax bracket, and pay more tax. —
Aaron Clarke, CFP, Halpern Financial, Ashburn, Virginia
3. Trade-offs in the Secure Act
The full impact of the Secure Act remains to be seen, but as we work through updating our strategies, we are communicating with clients the importance of being more deliberate in our planning. All decisions are inherently a trade-off between current benefit vs. future benefit. For example, a client’s beneficiaries will have a potentially larger tax liability unless the client is willing to take on the burden now by undertaking Roth conversions to pass on what is essentially a tax-free asset. Now we have to ask clients to not only consider their present self vs. their future self, but also future generations. —
Sergio G. Garcia, CFP, Quest Capital, Dallas
4. Two Most Important Points
1. Check with mom and dad; if you (client) are set to inherit an IRA, you will now be required to distribute it within 10 years. As an advisor, that would prompt me to help my client with tax planning, [especially] if the IRA to be inherited is sizable.
2. For clients who will be approaching 70½, they now have an additional two years to distribute their IRA RMDs. This is helpful also from a tax planning perspective. We may even be able to do more planning regarding Roth conversions in those two extra years where you will not have additional ordinary income due to the RMDs. —
Kristin M. Pugh, CFP, TrueWealth, Atlanta
5. Expect an Inheritance? Talk to Parents Now!
For young clients who anticipate receiving an inheritance, it’s important they have a conversation with the person whom they could receive an inherited IRA from. With the changes in the Secure Act, IRAs inherited by a non-spouse can impact the tax picture and after-tax amount received since the IRA must be drawn down in 10 years. It’s important to update your financial plan with the changes of the Secure Act for both young professionals and those who will be passing down money to younger generations. —
Travis Gatzemeier, CFP, Kinetex Financial Planning, Flower Mound, Texas
6. 529 Expansion Means More Flexibility
The Secure Act brought a lot of changes, but 529 plans in particular have become even more attractive, allowing families to make tax-free withdrawals from their college savings plan for up to $10,000 in student loans, certain homeschooling expenses, and for qualifying apprenticeship program expenses. In the past ten years over 600,000 Americans have completed nationally registered apprenticeship programs, making 529s attractive even for families that aren't sure if their child will attend college. —
Brian Boswell, CFP, 529 Expert LLC
7. Tax Bracket Management More Important
Folks who have non-spouse beneficiary(ies) of an IRA account should analyze if a Roth conversion makes sense. Tax bracket management and tax projections will be vital in this strategy to ensure folks are not pushed into higher tax brackets unintentionally due to the conversion amount.
Because the new 10-year rule allows non-spouse beneficiary(ies) to hold off until distributing funds until year 10, having those funds grow in a Roth for 10 years may be preferential since the account can grow tax free and the distributions will be tax-free in year 10 for the non-spouse beneficiary(ies). —
Trevor Scotto, CPA, CFP, Fiduciary Financial Group, Walnut Creek, California
8. What to Expect
I just completed my annual reviews with clients and how I addressed the Secure act differed depending on the demographic and financial profiles of the clients. That said, I’ve been telling clients that the new law provides for some nice benefits to continue accumulating wealth with the delayed RMD start date and ability to continue contributions toward retirement plans beyond 70 ½; however, the biggest effect is on estate/legacy plans.
It further strengthens the case for Roth conversions and contributions, where applicable, to minimize the potential for a tax time bomb for their beneficiaries and it’s imperative to revisit your estate documents and beneficiary designations to ensure an appropriate level of flexibility is built in. —
Michael J. Henzes, CFP, Open Wealth Network, Pottstown, Pennsylvania
9. Heirs Need Tax Planning More Than Ever
A balance of taxable, tax-free and tax-deferred investments create financial flexibility for clients who are living longer, and likely to be naming fewer children as beneficiaries than previous generations. What to do with a $500,000 inherited IRA split among five beneficiaries in 2019 is a vastly different conversation than one or two beneficiaries who have to pay tax on that entire amount within 10 years.
This new law could even have ripple effects on college planning for some families. While taking advantage of lower tax brackets through 2025 and spreading out the taxable income over 10 years may result in the lowest tax bill, large increases in income could reduce potential need-based grants and aid in the FAFSA formula while children are in school. —
Sean M. Pearson, CFP, Ameriprise Financial Services, Conshohocken, Pennsylvania
10. Inheritance More Tricky
We put out an end-of-year message to clients summarizing the key points — RMD age change and the potential for higher RMDs as a result, traditional IRA contributions now available in retirement, etc. But the major discussion point came in my estate planning attorney role. I had to send out a letter and a flow chart to clients with inherited IRA trust plans to show the significant impact of the law. Clients have to rethink their plan goals and how best to address the tax and management issues that are generally at odds with one another. Bottom line — no simple solutions! —
George F. Reilly, J.D., CFP, Safe Harbor Financial Advisors, Fairfax, Virginia
11. Don't Forget Small-Business Plans
The Secure Act is a compelling planning tool for those nearing RMD status, or who may inherit a non-spousal IRA. I also think it’s essential for small business owners to educate them on how it impacts their employer-sponsored retirement plan (whether they have one or not). If my clients don’t fit either of these descriptions, chances are high they know someone else who does. —
Ashlee deSteiger, CFA, Gunder Wealth Management, Birmingham, Michigan
12. Add Beneficiaries
The government needs money and this speeds up your giving it to them. [One idea] is to add beneficiaries so the amounts received by each is less and therefore not so much a tax burden on fewer people. Of course they are then getting less. Don't think that is solving anything for all participants. —
Jon L. Ten Haagen, CFP, Ten Haagen Financial Group, Huntington, New York
13. How to Handle Shorter Distribution for Heirs
The Secure Act is a tax increase on those inheriting IRAs and other tax-deferred accounts. Prior tax law allowed those inheriting IRA assets to take money out of these accounts over their life expectancy; the current law cuts this dramatically. Before, a 50-year-old inheriting money could take minimum distributions and stretch the tax-deferral benefits over 34 years. Today, the deferral is limited to 10 years. The shorter distribution period requires larger annual distributions (often during the highest earning periods) and will result in much higher taxes. Owners of large IRAs should rethink how they pass these accounts to their heirs. —
Mark Wilson. CFP, MILE Wealth, Irvine, California
14. Plan for Heirs
The SECURE Act gives us an opportunity to update the financial plan, particularly for those intending to leave IRA money to their heirs. Specifically, our clients that have retired in their 60s should consider using the extended window between retirement and required distributions as opportunity to fill up the lowest tax brackets with Roth conversions — taking account of their heirs’ tax brackets relative to their own.
If the client had a trust as the beneficiary of her IRA, we’ll likely update to ensure the beneficiaries receive appropriate distributions over time rather than the entire lump sum after 10 years. —
Jonathan H. Swanburg, CFP, Tri-star Group, Houston, Texas
15. Not the End of the World
If it wasn't already, passing along assets in a Roth IRA is now without question the gold standard. For a beneficiary, the maximum 10-year value will be the lump-sum tax-free distribution from an inherited Roth IRA. Pair this with today's relatively low tax rates and you continue to have a strong case for finding ways to fund Roth accounts as much as possible. —
Jason Speciner, CFP, Financial Planning Fort Collins, Fort Collins, Colorado
The Setting Every Community Up for Retirement Enhancement (Secure) Act has been called the most comprehensive retirement security legislation in decades. Overall, it has received a thumbs up for several changes, such as:
However, the Act has received both cheers and jeers from the investment advisor realm. On one hand it gives retirees more time for the RMD, but on the other, gone is the stretch IRA that allowed for lifetime IRA distribution to heirs.
Our request to advisors through the Financial Planning Association and XY Planning Network on what they are telling clients evoked a flood of comments and advice. We’ve provided 15 of those comments in the gallery above.