What the SECURE Act means for your Estate

In 2020, a major new tax law went into effect. The SECURE Act.

The SECURE act has changed the rules on the Stretch IRA. As a refresher, the Stretch IRA was the term used when talking about children and non-spouses who inherit an IRA.

In the old law, children and non-spouses were able to stretch the IRA distributions over their own life expectancy.  Now, non-spouse beneficiaries have just 10 years to cash in IRAs.  The exception to this is if a sibling or beneficiary is 10 years younger or less than you.  This means, if your sibling is inheriting your IRA and is 8 years younger than you, they meet the 10 year test.  Your sibling will still be able to use the old rule and stretch the IRA over their life expectancy, not just 10 years.

This new law creates a strategic financial estate planning opportunity.  For instance, Roth Conversions are now much more valuable for beneficiaries.  This is because if you leave an IRA to a child, they have 10 years to liquidate it.  If this is traditional IRA money, your child will be paying taxes over those 10 years, and if the IRA is large enough, possibly jumping up in brackets.  However, if this is Roth money, they will owe no tax during those 10 years.  So the question becomes, should you pay the tax for your beneficiary, or should you save on the tax today and have your beneficiary pay for it in the future?

Summary: Roth Conversions have now become more valuable for estate planning.  For the parents, they must decide whether they want to pay the tax now and convert Traditional IRAs to Roth, or whether they would like to save on tax today, and leave the nest egg for their children to pay the taxes over a 10 year window.

There are various strategies around planning for the new SECURE Act changes.

Call us today to discuss.  817-238-6300

Matt Ward, CFP^®, CRPC^®