The SECURE Act – Part 2

In last week’s post I reviewed the changes to retirement accounts under a new law called the SECURE Act.  I started with the positive changes but not all about the new law is a plus.  The SECURE Act severely limits the ability of retirement account beneficiaries to stretch out the payouts.

As I explained last week, under the old rules, beneficiaries could stretch out the withdrawals over their life expectancies.  Now spousal beneficiaries can still take the distributions over their own life expectancies, however, other non-spouse beneficiaries can no longer do so (with some limited exceptions).  The majority of non-spouse beneficiaries must now withdraw the entire account value within 10 years.  Besides spousal beneficiaries, minor child beneficiaries, beneficiaries who are no more than 10 years younger than the deceased account owner and chronically ill individuals can still exercise the stretch provisions.

This change has an obvious impact for Americans whose retirement accounts have grown to six and seven figures.  Many have intended to withdraw only the minimum and leave as much as possible to children and grandchildren who could then stretch the withdrawals out over 30, 40 or 50 years or more.  That is no longer possible.  In fact, the tax hit could be greater for the children than for the senior account holder. This change also has an impact with respect to the long term care planning that as elder law attorneys we help clients put in motion.  With the tax advantages of passing on a retirement account to heirs being drastically limited, drawing down those tax deferred accounts first to pay for long term care while protecting other nonqualified accounts from the cost of long term care makes even more sense and drawing out more than the required minimum distributions in many cases may actually make more sense from an income tax standpoint.