Planning for the Secure Act

The “Secure Act” was part of a larger law that passed with bipartisan support in late-December 2019. It went into effect on January 1, 2020, for most purposes. As part of our blog series on The Secure Act and what it means for you, this second article examines planning strategies for dealing with the Secure Act.

As noted in our previous article, the Secure Act requires more rapid distributions of retirement benefits to most beneficiaries, and a 10-year rule for all except “eligible designated beneficiaries.” So, assuming your beneficiary would be subject to the 10-year rule, what can you do to get the best stretch?

Maximizing Your Stretch Distributions Under the Secure Act

There are no perfect solutions, but here is a strategy to help you make the most of the “stretch” distributions allowed under the Secure Act. It is to “Roth” the retirement assets while you’re alive. When you convert your IRA to a Roth IRA, you pay income tax on the assets upon conversion. After that, you never have to take distributions during your lifetime. When you or your beneficiaries take distributions, they’ll be free of income tax, including any growth on the assets. This is because you’ve already paid the income tax due to the Roth conversion.

After the Secure Act, your beneficiaries will still be subject to the 10-year rule (unless they’re “eligible” as outlined in our last article.” But, they could also wait until the end of the 10-year period and take the entire balance out at that time. This would allow the assets to grow free from income tax for the longest possible period.

Why Convert Your IRA to a Roth IRA?

Without a Roth conversion, the beneficiaries would likely need to take them over several years to minimize the impact of taking the retirement assets into income and driving the beneficiary into a higher marginal income tax bracket. The Roth strategy avoids that because the withdrawal of the assets doesn’t impact the beneficiary’s taxable income because a Roth IRA is tax-free upon distribution.

The Secure Act is now part of the law. If you have questions, a qualified estate planning attorney or financial planning professional can help you understand and implement the Roth strategy – or look at other strategies for success.

Call (800) 265-2314 to contact our team at Pearson Butler and explore your legal options.