As people around the globe celebrated a new year and a new decade, U.S. lawmakers celebrated the passage of a new law. On January 1, 2020, the SECURE Act quietly slid into place after months of back and forth negotiations between legislators. As complex as it is long—1,773 pages to be exact—many people are wondering how this law is going to affect them personally, but they don’t want to sit and read all of the boring, bureaucratic legalese. To save you time in sifting through this lengthy piece of legislation, here is a simplified explanation of how the SECURE Act might affect you and your family.
There are two main goals the SECURE Act was enacted to achieve. The first applies to the age at which people must withdraw money from their retirement accounts. Individuals with 401ks and IRAs were previously required to start withdrawing money from such accounts at 70 ½ years old. These required withdrawals are called Required Minimum Distributions (RMDs). A change welcomed by most retirement plan holders, the SECURE Act will allow them to wait until they are 72 years old to take out RMDs.
Second, the Act places new and severe limitations on when a beneficiary must pay the taxes owed on an inherited retirement plan. In the past, an individual who inherited money from a retirement plan after his loved one passed away had the ability to stretch out paying the taxes owed on the inherited account over his lifetime. The SECURE Act would change this significantly, by forcing beneficiaries to pay the taxes owed on the plan over only 10 years.
For example, John* is a father who put his hard-earned money in an IRA through his employer. John had a son named Mark and a daughter named Mindy—both are doctors who are doing very well for themselves financially. Before John passed away, he named Mark and Mindy as the beneficiaries of his IRA. Because Mark and Mindy make a lot of money as doctors, they are in a higher tax bracket with a steep marginal tax rate. When John died, Mark and Mindy inherited money from their father’s IRA, and implementing their marginal tax rate, they owed a hefty amount in taxes to the government.
In the past, this hefty tax bill was made less burdensome on people like Mark and Mindy because they could stretch out paying those taxes over their lifetimes. Had John passed away prior to January 1, 2020, Mark and Mindy would have had less of an immediate tax burden because they could pay the taxes owed on the IRA bit by bit over their lives. However, because John died after January 1, 2020, Mark and Mindy only have 10 years to pay the large tax bill on their inherited IRA.
Why would government officials want to make these changes? Most markedly, the United States is currently over 23 trillion dollars in debt. With many from the “Baby Boomer,” “Generation X,” and “Millennial” generations saving money in accounts like IRAs and 401ks, cashing in on the taxes owed sooner rather than later means the government has a quicker influx of money to help offset the United States’ astronomical debt. Adding the provision about delaying the RMD age to 72 years is a way for lawmakers to soften the blow of a more demanding tax constraint.
How should you respond to this change in law? That answer isn’t so simple, because it depends on your assets, needs, and goals. There are even rare exceptions that might preclude you from the more demanding provisions of the SECURE Act. It is important to meet with a professional qualified to give individualized financial and legal advice. At The Elder Care Firm and Castle Wealth Group, we have attorneys and a fiduciary financial advisor who can explain how this law affects you personally, and how you can best respond to it.
If you want to make sure you never miss updates on new laws that could drastically change your future financially and legally, participating in The Elder Care Firm’s Client Care Program creates an even stronger level of protection. For a minimal annual fee, clients meet with The Elder Care Firm and Castle Wealth Group yearly to check for changes in law, health, and circumstance. If enrolled in the Client Care Program, clients who want to switch out an individual who is listed as their medical or financial power of attorney or trustee can have their documents updated with no additional charge. The annual meeting is a great way to have peace of mind that you will be protected.
If you are wondering how this or any law affects your legal and financial future, please contact The Elder Care Firm and Castle Wealth Group today at (888) 390-4360 or via email at contact@theeldercarefirm.com.
*Specific individuals named in this article are fictional