With tax season getting into full swing, several of my clients have come in for planning sessions. We look at a few things during these sessions – many of which have been impacted by the passing of the SECURE Act, which went into effect January 1st, 2020. The SECURE Act has many complex factors to it, but I wanted to highlight a couple of that will most likely impact your personal financial situation. The following two changes underscore the importance, now more than ever, to work with your financial team to identify different strategies, such as life insurance and ROTH conversions, to reduce your tax exposure.

Prior to the SECURE Act, individuals needed to start taking Required Minimum Distributions (RMDs) from the traditional retirement plans once becoming age 70 ½. If an individual failed to make their distribution appropriately for the calendar year, they would be subject to a steep penalty of up to 50% of what their RMD should have been. The SECURE Act is recognizing people are starting to live longer, and thus, increased the beginning age for the distribution of RMDs to age 72.

Let’s look at an example of this: If Henrietta turned 70 ½ in 2017 and, even though she didn’t need the money to live on, she would be required to take the money out of her Individual Retirement Account based on its value on December 31st of the previous year and using the IRA RMD Worksheet provided by the IRS at https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf. Now under the SECURE Act beginning in 2020, the IRS will provide the table and the amount that must be taken out is still based on the retirement account’s balance on December 31st of the previous year. This seems like a great change as it gives assets a little longer to grow in a tax-free account; however, we do need to consider some of the other changes the Act brought to the 2020 tax year and beyond.

One of the other biggest differences that will impact individuals is what was known as “stretch IRA”. This stretch situation occurred when a family member passed away and left their IRA to a non-spouse family member. For example, if Henrietta passed away in 2018 and left her $2 million IRA to her granddaughter Suzy who was 45, Suzy would have taken RMDs on that money based on the value of the account on December 31st of the prior year, using the IRS’s table based on her age of 45. This all changes under the new rules. Now, let’s say Henrietta passes away in 2020 and Suzy, now 47 years old, will receive the distribution, however, instead of lasting over her lifetime, it is now over a 10-year period. Considering the typical size of the plan and that Suzy is in the higher-earning years of her career, this will create a considerable tax burden. To demonstrate this, let’s assume Suzy and Henrietta both lived in the state of Oregon. Remembering that Oregon has an estate tax that starts at 10% before the inheritance transfers to Suzy, and assuming Suzy is in the 32% percent federal income tax bracket and the 9.9% Oregon state income tax bracket, this means Suzy could end up paying around 50% of her inheritance to taxes!

These types of changes in tax law can be overwhelming and because of this, tax professionals prefer to frequently meet with their clients to ensure the client’s finances are all on the right track.