How the SECURE Act will affect taxes

On Behalf of | Aug 9, 2019 | Income Tax

Anyone who keeps up on the news has likely read or heard about the Setting Every Community Up for Retirement Act that recently passed the House vote. The Senate is set to vote on it, and it is expected to pass without issue. The name of the bill certainly sounds like it is meant to help people, but will it? In the end, it will affect how much people in Connecticut and elsewhere have to pay in taxes. 

The SECURE Act will change the way that retirement funds are distributed when their account owners die. If someone names a beneficiary to their account, currently, that beneficiary can slowly withdraw the funds over time, which will limit his or her tax liability. The proposed law will make it so that account funds have to be fully removed in 10 years — 5 years if the account does not have a designated beneficiary — with a few exceptions. This will increase the recipient’s taxable income, therefore increasing his or her tax burden.

Those who wish to do so may put their retirement accounts in trusts, which is not new. What is new is how they will be treated even though they are in trusts and who can be the beneficiary of the trust. According to a recent report, the recipient has to be a natural person. So, those who wants their retirement funds to go to a charity or other organization through a trust will no longer be able to do that. Those who do take trust distributions may be subject to a higher tax burden. 

So, who does the SECURE Act help? It would seem it benefits the government more than it helps anyone else. Is there a way around it? It all comes down to how an estate plan is written and what the beneficiary does with the funds once received. As this will be new for everyone, there are likely to be some problems that pop up when it comes time to pay taxes; but, Connecticut residents can turn to an experienced tax law attorney if they need clarification on the rules or assistance addressing any issues that arise with the Internal Revenue Service.