The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law on Dec. 20, 2019, and it makes major changes to the federal rules for Individual Retirement Accounts (IRAs). What does the SECURE Act mean for high-net-worth investors, especially in times of economic uncertainty? It likely means you’ll want to review both your retirement plan and your estate plan with a wealth advisor.
“There are many changes in the act,” says James Mosrie, Senior Wealth Planner at Wells Fargo Private Bank. “The two most significant impacts on high-net-worth individuals and families are the elimination of the ‘stretch IRA’ and the extension of the age for required minimum distributions (RMDs) from 70½ to 72.”
Mosrie adds that the SECURE Act makes other wide-ranging changes, including changes to rules governing employer-sponsored retirement plans and federal tax breaks for education and adoption. These are likely to be less significant for high-net-worth families.
IRA stretches now have a limit
The SECURE Act significantly changes how people who inherit IRAs must handle the funds.
Previously, if you inherited an IRA, you typically only needed to withdraw the RMDs each year. That meant the tax-free growth potential of the IRA could often be stretched out over long periods—potentially decades—and the account could even increase in value over multiple generations.
“Now you need to withdraw, or at least be taxed on, the full amount within 10 years,” Mosrie says. “Theoretically, you could wait until the end of the 10th year to withdraw so that the full amount continues to have the potential to grow … but that might push you into a really high tax bracket.”
The new withdrawal requirements, which also apply to Roth IRAs, mean that most heirs can’t stretch withdrawals over more than 10 years to break the tax exposure into installments, and most heirs also can’t delay taking any withdrawals beyond 10 years to wait for a time when their tax rate might be lower. That said, spouses, minor children, and individuals with disabilities who inherit an IRA won’t be subject to the 10-year limit.
Mosrie says high-net-worth individuals and families may want to discuss with their wealth advisors the full impact of the 10-year rule, what it could mean for their estate plans, and the impact on their heirs and other beneficiaries, such as nonprofit organizations. They may also want to discuss Roth IRAs versus traditional IRAs, given the change in tax implications for heirs.
The required minimum distribution age has increased
Another big SECURE Act change gives investors more flexibility in how long they can contribute to IRAs, and how long they can wait before they must start taking distributions, both of which could be desirable in light of recent swings in the markets.
The law changed the RMD age to 72. Previously, IRA owners needed to start taking RMDs each year from their IRAs at age 70½—even if they didn’t need the money.
When you don’t need the income, “the required minimum distribution is more of a nuisance or a tax problem,” Mosrie says. “But since the SECURE Act delays the RMD age to 72, you may get some additional tax deferral and growth.”
Mosrie offers one more consideration for 2020 based on the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act: “Under the newly passed CARES Act, RMDs are waived for 2020, unless it was the first year for a required RMD. The CARES Act also allows account holders to withdraw funds from retirement accounts without early withdrawal penalties under certain circumstances related to COVID-19.”
Be sure to consult with your tax, legal, and wealth advisors before making changes based on these changes to the law.