The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, is designed to help us set more money aside for retirement. There are changes, however, that may affect your estate planning.

An important note: there are many details and exceptions in the SECURE Act, so not all information that follows will apply to all!

One significant change affects those who inherit IRAs or 401(k)s. Before, those who inherited an IRA or 401(k) could extend taxable distributions and subsequent tax payments over the course of their life, commonly known as taking “stretch” distributions. Stretch distributions from an IRA or 401(k) have often been used as a reliable source of income over the beneficiary’s lifetime. Another benefit of stretch distributions is that you defer paying taxes until you receive the distributions.

Post SECURE Act, only a surviving spouse of the IRA or 401(k) owner can take stretch distributions. You may also be able to take stretch distributions if you fall into one of the three eligible designated beneficiary categories defined as a minor child of the IRA or 401(k) owner, a person no more than ten years younger than the IRA or 401(k) owner, or a person who is disabled or chronically ill.

For almost everyone else, there is a ten-year deadline. The full amount must be withdrawn no later than ten years after the calendar year of the original owner’s death. The biggest problem here is taxes. The cumulative taxes may add up to a number that is hard for your individual beneficiaries to plan for and pay. What that means: your beneficiaries will need a plan to withdraw the funds and pay taxes as needed, and they’ll need to carefully follow that plan. You know your beneficiaries and whether or not they are likely to struggle with this. The other problem is that for large IRA or 401(k) accounts, the amounts distributed over ten years will be significant and could be vulnerable to the creditors, judgments, and divorce proceedings of the beneficiary unless proper planning is put in place. 

Most people choose one of three options: withdraw funds evenly over ten years, withdraw everything at the end of ten years, or withdraw funds as needed or as they want over the course of ten years. There are many elements that affect this: the state you live in (higher or lower income taxes), how much total income you’ll receive, and the subsequent taxes that must be paid, among others.

The changes in the SECURE Act may sound complex. And, they are likely to affect your estate plan. We’re here to help. If you have any questions or would like to set up a consultation, please contact us.

More on the SECURE Act: This is part two of three blog posts that detail how the SECURE Act may affect your estate planning and your legacy. Read more about what the SECURE Act 2.0 has changed and whether you should make a trust the beneficiary of your IRA

To proactively adapt your plan to changes in estate and tax laws and regulations, we recommend that our clients enroll in the JM LAW CARES estate and legacy planning maintenance program. To find out more, see our overview of the JM LAW CARES program.

This post was created by Jessica Marchegiano, founder of JM LAW and senior estate planning attorney.

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Disclaimer: Materials prepared by JM LAW, PLLC are for general informational purposes only. Educational material does not create an attorney-client relationship and is not an offer to represent you. You should not act or refrain from acting based on information provided.

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