Secure Act Regulations and the Impact on Middle-Class Families


Secure Act Regulations and the Impact on Middle-Class Families

There are many things that you’re probably not aware of, which you probably should be aware of. There are families who come to us with significant issues threatening their family and relationships, mental health, and finances. These are people who represent the middle-class. 

While I know there are abundant opportunities to live a good life, I think the regulations and some of the government rules are making life a bit harder. Hopefully the Coronavirus pandemic will soon be a thing of the past, but with that, there has been massive government spending to deal with the pandemic. As a result, we are seeing the ramifications with higher prices, and middle class Americans are going to feel the pinch. The situation in Ukraine isn’t helping with the inflation issue we are wrestling with. While I’m not qualified to tell you how to deal with inflation, there are things you should be thinking about, which I can help you with. 

The two things that I have seen that have significantly impacted middle-class Americans over the last few years, are the Secure Act and Long Term Care Expenses.

What is a Stretch IRA?

We all work hard to save money. If we have kids, we try to raise them with good morals, values, principles and faith. Over time, people accumulate assets, and many American Baby Boomer generation have a lot of their net worth in their primary residence. This generation also put money into retirement accounts in the 1960’s and 1970’s, to get tax deferred growth. They didn’t know what the tax situation would be when they needed to pull their money out. Many of them are retiring now and there is massive wealth that has accumulated in these retirement accounts. This is likely one of the biggest transfers of wealth in world history. A promise was made to these baby boomers on this provisor: if they grew their retirement account, and the leftovers not spent during their retirement was given to their adult kids, the IRA stretch account conditions would apply.

Essentially, Dad’s retirement account could become the kid’s retirement account. If the children let that money grow, by the time they reached their retirement years, they would have a lot of money to live on. To give you an example, a father left his son a $200,000 retirement account. When the father passed away, the son who was 55 years old at the time, inherited this account. The son invested the money at 7%, so he would get $400,000 at the age of 65, given that money doubles every 10 years. He would have $800,000 by the time he is 75 years old and the money would keep growing. Of course, there would be some required distributions made over time, but most of the money would stay in the retirement account. The money that the son had been saving could then be transferred to his kids.

The Baby Boomers

The middle-class didn’t realise how good things were, but the IRS were watching those retirement accounts for a long time, knowing there was taxable money in those accounts. They were counting on the fact that as soon as the distributions were made, there would be income tax money. This money would pay for all the government spending. There were several attempts over the years to get rid of the stretch IRA, but as it was a promise made to the baby boomers, it could not be revoked.

The Secure Act

In January 2020, there was a law passed called The Secure Act, which essentially is a giant income tax hike on middle-class Americans. Most people did not understand how the changes would affect them. The kids of the baby boomers are not going to know what they have lost, because inheriting the IRA is like found money. The kids don’t realise that they might have been able to triple the money which was tax deferred for 30 years, which was the case before the Secure Act. The Secure Act eliminated the lifetime stretch on the retirement accounts, when kids inherit the accounts. Now when a child receives a $200,000 retirement account, the IRS requires that he pulls the money out over 10 years.

It means he loses out on 30 years of tax deferred growth on the money. Also, at the age of 55, when he inherits the account, he is likely still working and is not ready to retire. He is not able to wait until his retirement years to take the money out when the tax bracket has gone down. Instead, he has to take the money out between the age of 55 and 60, and pay ordinary income tax rates on dad’s IRA money, as well as his own income. Added to that, with the government spending, tax rates might also increase. We are in a situation where the family of the baby boomers are going to be negatively affected on their retirement accounts and they don’t know it.

Don’t be Afraid to Ask for Advice

If you have lost a family member since the beginning of 2020, and you inherited retirement funds from that deceased person, you need to speak to somebody now about whether you have been following the rules. We are interpreting the rules one way and now they’re telling us differently. There may be people who inherited money in the last two years, who didn’t take distributions. This is because they didn’t think they needed to take distributions, but they do.

Fortunately, most of us are not going to pay federal tax. As it stands, when we pass away with $12 million in assets, there is no federal tax. However, the Secure Act is a type of tax, due on our retirement account. It is due within a defined time after somebody has passed away. While it is within the income tax regulations, it appears to be more like a death tax. A kid of a retired school teacher receives $600,000 in retirement accounts, he has to pay tax on that money within 10 years.  However, if he receives an inheritance of $12 million that is not in retirement accounts and is not taxed. It hardly seems fair. The Secure Act, coupled with the increasing cost of long term care expenses is really crippling.

Long Term Care Expenses

This is the other issue making middle-class families go broke. The cost per month in a nursing home in 2021 was almost $12,000 per month. Admittedly, nursing homes incurred a lot of expenses due to staffing issues and the cost of PPE equipment for Covid. As a result, this year’s figure is almost $15,000 per month on average for a skilled nursing facility. Given that statistics point to one in three people getting dementia which requires long term care, this is concerning.

We don’t work our entire lives to lose it to the government with issues like dementia, or long term care. I want to emphasise that the nursing home is not to blame in this case. Rather the rulebook which says that Medicare is not going to help you is to blame. You should not have to go broke before Medicaid will help you. You don’t work your whole life to lose your assets to the secure act, and long term care expenses. The goal of saving money was to leave a better future for your children. I also want my wife to be taken care of financially, if I have a stroke or pass away. Sadly, these principles are currently in jeopardy.

Come to Our Workshops

I really want families to take action, and not leave themselves exposed to these issues. If you have a financial advisor who has not spoken to you about the Secure Act, please ask them questions. Ensure that you are comfortable with the answers and that you understand the Secure Act. If this concerns you, please come to one of our workshops where you will learn about the Secure Act. You will also learn how to protect assets from long term care expenses and the harsh government rules. Click here to register for an upcoming workshop