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The SECURE Act of 2019

Positive Impact On Retirement Savings, Challenges When Passing On Substantial Retirement Account Balances


The U.S. Congress often uses the tax code to influence the behavior of American citizens. For example, it is in our nation’s best economic interest to have a robust real estate market. Therefore, our tax code provides many favorable tax provisions related to home ownership. It is also in our best interest to have people support charitable causes. Therefore, the tax code offers numerous tax deductions for gifts to charitable organizations. In a similar fashion, it is in our nation’s best interest for individuals to save sufficiently so they are capable of financially supporting themselves during retirement. Therefore, our tax code contains numerous tax advantages for employer sponsored qualified retirement plans and individual retirement accounts (IRAs).

In order to further incentivize retirement savings, Congress recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, a new tax legislation that will significantly impact employer provided qualified retirement plans, such as 401(k) plans, and individual retirement accounts. Many of the provisions are simply minor tweaks, such as increasing the age at which required minimum distributions must be taken from age 70 1⁄2 to age 72. Other provisions are aimed at making changes to employer provided plans, such as a provision that permits more part-time employees to participate in qualified plans. In addition, there are changes that maximize the appeal of retirement plans such as a provision eliminating penalties for withdrawals used to cover the costs of child birth or adoption and a provision allowing IRA owners to continue contributing to their IRAs past age 70 1⁄2.

However, there was one change that could have a negative impact on families who have accumulated substantial amounts in their qualified retirement plan or IRA. A participant in a qualified retirement plan or the owner of an IRA may name younger family members (typically their children) as the beneficiary. Upon death, the beneficiary may choose to have the entire account balance immediately distributed to them. However, with a few exceptions, the entire amount would then be considered taxable income to the beneficiary in the year of the distribution.

“I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.”

Arthur Godfrey

With larger account balances, a distribution could be taxed at the highest federal income tax rates (37% in 2020). Prior to the SECURE Act, the beneficiary also had the option to spread distributions over a period of time not to exceed their expected lifespan. Stretching out the payments over a longer period of time allowed the funds to accumulate tax-deferred for longer and would generally reduce the tax rate on the distributions.

The new rules state that distributions to individuals other than your surviving spouse, a disabled or chronically ill individual, individuals who are not more than 10 years younger than you, or a child of yours who has not reached the age of majority, are generally required to be distributed by the end of the 10th calendar year following the year of your death. Your beneficiary may choose to take a distribution at any time and in any amount, or to take no distributions at all, prior to 10 years. But before the end of the 10th year it all must be distributed.

Planning Tips

While the new laws create challenges for those who wish to pass on their retirement plan balances to their heirs, there are still a number of strategies available to minimize the tax impact. The appropriate solution will depend on the specific financial and estate planning goals you have for your family.

  • Roth Conversion: While federal income tax rates are historically low, consider converting a traditional individual retirement account (IRA) to a Roth IRA. The conversion will trigger an income tax, but any future growth will be tax-free. Upon your death the Roth IRA will be subject to the same new ten-year distribution rules as traditional IRAs, but distributions will not be subject to income taxes to your heirs.
  • Purchase Life Insurance: You may consider taking taxable distributions from your qualified plan or IRA during your life (again, while taxes are low) and use the distributions to purchase life insurance. The death benefits will be received income tax free and may provide a greater net amount to your children than the retirement funds would have.
  • Trust Beneficiary and IRA Trust Reviews: One strategy that is still available is to name a trust (often referred to as a “discretionary” or “accumulation” trust) as the beneficiary. While the new tax laws make this strategy less than favorable from a tax perspective, the trust may be designed to pay out retirement account funds over a longer period of time. Also, review any IRA Trusts for language like “the beneficiary has access only to the RMDs from the IRA each year” which could lock up Trust Assets until the end of the 10-year period and force an income windfall in one year on the beneficiary.
  • Spousal Split Trap: Should a spouse not require all IRA assets for income purposes, you may consider listing heirs as a partial beneficiary of the IRA assets. As a result, the heirs will receive a portion of the IRA assets upon the first death, starting one 10-year period. The heirs will then receive the additional IRA assets upon the second passing, starting a second 10-year period and stretching the tax burden across a greater period of time.

If you wish to discuss the SECURE Act, the effect on your unique financial plan, and strategies for improvements, call Symphonic at 1-800-926-1647, send an email to, or contact your Symphonic Financial Advisor.

Joe Calhoun, CFP®

Joe Calhoun is the Director of Financial Planning for Symphonic Financial Advisors, guiding our Financial Advisors in delivering custom-tailored planning services for clients.

DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.