4 Strategies to Leverage with the Secure Act

• by secure_financial
• Posted on 13 January, 2020

With the SECURE Act being signed into law you should be reaching out to your clients with workarounds to minimize taxes.  The Secure Act has been the largest retirement legislation passed in the past ten years prompting questions that will impact your client’s 401K and their withdrawal strategies.

The new legislation requires non-spousal beneficiaries to deplete inherited IRAs within 10 years, leaving retirees who planned to leave their accounts to heirs wondering what to do about the significant tax burden.  This is leaving your clients with potentially higher taxes and less tax-deferred growth of their accounts.  While you reach out to your clients about the new legislation also consider having them review their beneficiaries.

There are a few strategies that you can offer to your clients looking to minimize their financial legacy while none of them are near the lucrative tax-deferral benefits of the stretch IRA, they may achieve similar goals.

These financial tools include Charitable Trusts and Irrevocable Living Trusts, Roth IRAs, and Permanent Life Insurance.

1. Charitable Trusts are a creative tool for generous clients who are looking to give large amounts of money yet would also like to generate income while they are alive. A charitable trust allows you to leave money to an heir and to a charitable organization. The big picture is donating growing investments into a trust which eliminates the capital gains.  This allows your client a tax deduction and generates income. Be sure to think through your client’s goals as the longer the period for the stream of payments, the less the tax deduction.  Consider working with an estate planning attorney or CPA to ensure there are no tax errors.
2. Irrevocable Trusts may be created by the IRA owner and then prompt them to purchase a life insurance policy within the trust. (Naming a trust as the beneficiary of an IRA also protects the funds from creditors for your heirs.) The IRA owner would then be able to take the distributions from the IRA and make gifts to the trust that would be intended for the annual premium payments on the life insurance policy before they pass. At death, the life insurance policy’s death benefit would fund the trust and set up a regular income stream to the heirs.
3. Roth IRAs should be considered for legacy planning. As your clients may not need to worry about taxes just yet. They should consider where tax rates may be after their death when their heirs will need to start taking distributions. A non-spousal beneficiary who inherits a Roth IRA can take the RMDs over his or her own life expectancy. The beneficiary may also take distributions without being taxed (must be at least five years since the initial contribution). The funds left in an IRA will continue to grow tax-free.
4. Replace the Stretch IRA with Permanent Life Insurance. While an inherited IRA can be stretched, the distributions will generally be taxable. Though inherited Roth IRA the distributions will generally be tax-free to beneficiaries.  The Roth IRA is paid for using funds that could be better leveraged for life insurance instead. Life insurance distributions are tax-free to the beneficiaries and are not subject to RMDs.  This strategy works well for your IRA clients who want to pass as much as possible to their heirs.