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MAKING CENTS: Tax savings from SECURE Act?

John Napolitano
CFP CPA
Smyrna/Clayton Sun-Times

It’s not every day where the intersection of good planning and opportunity cross over because of a policy or law change. But it appears as if the SECURE Act has created such an opportunity.

This opportunity exists now for families where a loved one passed away in 2019 with retirement account balances that haven’t yet been converted to a beneficiary IRA. Naturally, with larger retirement accounts there’s more opportunity for intergenerational planning that may turn out to be a huge intergenerational tax savings.

As always, it’s not simple. Let me explain.

The biggest planning obstacle put up by the SECURE Act is the loss of the stretch IRA. The stretch IRA is the rule that allows retirement account beneficiaries to take distributions from inherited retirement accounts over the life expectance of the beneficiary. Generally the stretch is a nice deal in that it permits a longer term tax deferral through lifetime distributions.

The new rule is to limit most inherited retirement accounts to a 10 year period for distribution. It does not have to be 10 years spread out evenly. A beneficiary may wait until the end of year 10 and take it all. Most, however, are likely to weave this into their yearly tax planning and take bits and pieces as their planners may advise.

If a loved one passed in 2019, their retirement accounts are under the old law that includes the stretch provision. So someone 60 years old and who just inherited a retirement account must begin taking distributions, spread over life expectancy, by December 31, 2020. This 60 year old is required to take about 4% from this inherited retirement account.

If the IRA had contingent beneficiaries, there’s yet another planning opportunity that may work well. A few conditions that may make this optimal include the following:

1)     You, the inheritor, do not need these inherited assets;

2)     You, the inheritor have a next generation that you’d like to give these assets to;

3)     That next generation has their act together financially.

If the contingent beneficiaries were properly named prior to death, then the inheritor may disclaim the funds and the retirement accounts are put into an inherited IRA for the next generation contingent beneficiaries. If said beneficiaries are 30 years old, their required distributions will be about 2%, allowing a way more favorable stretch and deferral period for the new beneficiary. As long as the contingent beneficiaries are younger than the original primary, a more favorable tax outcome may be achieved.

See if you or a loved one may benefit from this planning idea.

A more significant planning item is that your loved one’s retirement accounts should have had contingent beneficiaries - as should yours. With or without the SECURE act or any other policy change coming down the pike, good, advanced planning is likely to help. Don’t get caught by surprise with the next change and get your financial house in order with someone proactive and competent today.

John P. Napolitano CFP®, CPA is CEO of U.S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.