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The Secure Act RMD Rules for Beneficiaries- Are You Ready?

The Secure Act RMD Rules for Beneficiaries- Are You Ready?

Clear Direction for Your Retirement:

The Secure Act RMD Rules for Beneficiaries- Are You Ready?

There’s not much argument that most financial advisory offices focus on the accumulation phase of retirement planning. Saving, investing and growing our wealth is certainly very important but if approached myopically without proper planning in all areas of the retirement plan it can become a self-defeating approach. For example, improper tax planning can devastate even a well-intentioned wealth accumulation strategy over the long-term if not addressed. 

One common thing we find with new folks coming in to see us is that they have most, if not all, of their retirement savings in tax-deferred accounts such as IRAs, and 401ks. In many of these cases, we find that the client will never spend or need all the money that they’ve saved. 

This not only can cause tax-flexibility chal-lenges for their retirement years but under relatively new regulation (The Secure Act of 2019) it can and will present tremendous challenges to their heirs. So, you may have saved well, but there’s a higher likelihood today versus 3 years ago that ultimately you’ll give a big chunk of that savings back to Uncle Sam possibly before death but definitely afterwards depending on your situation.

The Secure Act regulations for required minimum distributions (RMDs) for heirs has changed the planning landscape for many investors. These regulations were the final nail in the coffin for using IRAs for wealth transfer and estate planning. They don’tdiscount the advantage

of accumulating wealth per se’ 

but they do underscore the need for financial planning and flexibility within your plan for the changing economic landscape over time.  

So, what’s the problem with the new RMD regulations? Well, for spousal beneficiaries of qualified accounts (IRA’s, etc), there’s no change really. Spouses won’t be affected much. It’s non-spousal beneficiary heirs (like your children) that really got the shaft in this new regulation. 

Under previous rules, depending on the date of death of the IRA account holder, non-spousal beneficiaries could “stretch” the inherited IRA RMDs over their life expectancy effectively stretching their tax liability out over a long period of time. That’s gone!  

The current RMD regulations for non-spousal heirs now force the money out of the inherited IRA very quickly (within 10 years) after your death which means the tax

“window” is very short and thus higher taxes are paid over a shorter period of time. Couple this with the likelihood of higher tax rates in the future and it’s a double punch

in the gut for heirs. We are also finding that this causes not only higher taxation on the heirs IRA inheritance but also on all the other income the heir is earning at that time and that can affect many different unintended areas such as college planning for their children.

   This is not something you want to ignore. It not only can affect you (in terms of what’s needed to mitigate the problem if it can be or is desired to be mitigated) but also your children and grandchildren. It is true that for some there’s simply nothing they can do to avoid this pit-fall based on their situation. Unwinding their tax issues causes other problems such as asset/income longevity shortfalls. Unfortunately however, many are not taking this seriously when there is something they can do and it’s going to cost their heirs a pretty penny. 

Evaluating and solving this issue does involve tax, income, investment, insurance (possibly) and estate planning to fully know to what extent, if any, the course can be corrected. This underscores our firms belief and com-mitment that retirement planning should be coordinated across many areas and flexible to change as needed. 

So, what are the key take aways:

  1. Your heirs could take a big tax hit unless you do some financial planning.
  2. Your heirs need to be introduced to and meet with your financial planner. This involves them as well and they’ll need to plan accordingly.
  3. Your advisor should have already informed or talked to you about this and if not, ask yourself why?
  4. While the IRS says these regulations are in-force but not yet final, it could be years before final regs are issued.


I hope this is helpful to your retirement journey. Call us, come see us or visit us at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you Clear Direction for Your Retirement®.

Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appro-priate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first
5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. With-drawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.

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