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What Should I Know About the Secure Act?

Mockaitis Law Group LLC Jan. 4, 2020

When planning your estate in Illinois, you likely included provisions for how you want your qualified retirement accounts handled. These include your 401k. A recent law passed at the federal level could impact your plans in a negative way. MarketWatch explains that the Secure Act changed the way that your heirs receive money from retirement accounts, and it could mean a severe tax impact on them.

The Secure Act puts a limit on how long your heirs have to withdraw the money from your retirement account. Instead of having the option to withdraw over their lifetimes, your heirs now must remove all the money from the account within 10 years. By the tenth year, the account must not have any money in it at all.

This will not affect your spouse, who can withdraw whenever and who also has the option of rolling it over into his or her own 401k. It also will not apply to a disabled beneficiary. If your child is under the age of 18, he or she will not have the limit imposed upon him or her until reaching the age of 18. So, minor children have until age 28 to withdraw all the funds. Also, if a beneficiary is not 10 years younger than you, it also will not impact him or her. This is for a situation where you have a beneficiary who is just slightly younger than you.

The problem here is that your beneficiaries will have to pay taxes for the money they take out of the 401k. It is important to note that the beneficiary pays taxes on the money at his or her tax bracket. Before, they had time and could wait to withdraw the money when they were in a lower tax bracket or once they reached the age where they would not face tax penalties. With the Secure Act, though, you may need to adjust your plans to help them avoid high taxation. This information is for education and is not legal advice.