How Would the SECURE Act Affect Your IRA?

Looming legislation may have an impact on plans to leave IRA accounts to adult children… Here’s why:

The legislation would require certain beneficiaries to accelerate the distributions they’re required to take out of inherited IRAs.
If your adult children beneficiaries are forced to take out sizeable amounts of money from the account, it not only impacts your legacy plans but also adds a potentially larger tax payment to Uncle Sam.
This is different from current rules that allow certain beneficiaries to “stretch” distributions over their lifetimes. Smaller distributions, spread over a longer time frame, generally result in more preservation of the portfolio and less taxes for the heir.
Specifically, the proposed house bill wants to make beneficiaries of some IRAs take all of the money out in a maximum of ten years. This would mean more money out over a shorter time frame, in theory creating a larger tax liability for whomever the beneficiary is of that account. The less aggressive senate version of the bill calls for a $400k limit on the amount that can be stretched but wants the money above and beyond that limit out in a maximum of just five years.
I think it’s reasonable to expect we’ll be facing some combination of these two proposals. Perhaps an exemption on some amount (allowing the original stretch rules) then requiring the remainder to be out in a specified number of years, likely between five and ten. However, this is speculation so it’s still anyone’s guess as to the final changes, assuming something is passed.
What can you do about it? Nothing has been passed yet so it’s definitely not time to panic. It is, however, a good reminder to the value of regularly updating your financial plan. The best thing to do at this point is to revisit your plan and make sure your intentions are being best addressed with the information that is currently available.
This is also a great time to revisit who your beneficiaries are and make sure your beneficiaries are being designated correctly in your accounts.

Casey H. Pisano, CFP®, AIF®

Wealth Advisor