Keep Your Retirement Savings and Your Beneficiaries Safe After Sweeping SECURE Act Changes
You spend years preparing for retirement, establishing comprehensive estate plans and structuring assets to minimize tax liabilities and maximize the amounts available for yourself and your beneficiaries. But all it takes is one stroke of a presidential pen to disrupt all of that careful planning and force you to revisit your carefully crafted retirement strategy. That is exactly what happened when the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law at the end of 2019, bringing about the biggest changes in retirement planning law since 2006.
The SECURE Act contains significant alterations to age thresholds, required minimum distributions (RMD), and lifetime income options flowing from retirement accounts. Given the substantial substantive impact of the new law on existing IRAs and other retirement accounts, we highly recommend that individuals review their current plans with their estate planning attorneys and financial advisors. Failing to do so could lead to inadvertent and potentially catastrophic repercussions or the continuation of plans that no longer facilitate client objectives.
Here are some of the most notable changes in the law that all folks planning for retirement – and for their heirs after their gone - need to know:
“Stretch” Provision Is No More
Before the SECURE Act, non-spouse beneficiaries of IRAs and other defined-contribution plans like 401(k)s had to take required minimum distributions from those inherited accounts but could “stretch” distributions over the course of their lifetimes. Spreading out distributions over time allowed beneficiaries to mitigate their tax liabilities for each withdrawal while the funds remaining in the account continued to grow on a tax-deferred basis.
Those non-spouse beneficiaries of individuals who passed away before January 1, 2020 can still avail themselves of that lifetime “stretch.” But for most of those who inherit retirement accounts from individuals who die this year and thereafter (designated beneficiaries), they only have ten years from the date of death to distribute the assets held in those accounts. During those ten years, however, there is no annual RMD requirement. Exceptions to the elimination of “stretch IRAs” include those involving eligible designated beneficiaries who are:
- the account owner’s surviving spouse;
- a child of the account owner who has not reached the age of majority;
- disabled or chronically ill as defined by the Internal Revenue Code;
- not more than ten years younger than the account owner.
For accounts that have no designated beneficiary, the SECURE Act shortens the distribution period from ten years to five.
Because beneficiaries must now take larger distributions in a shorter span, they will also have to pay investment taxes on inherited IRAs much sooner than they had to under prior law.
The elimination of stretch IRAs is particularly impactful for those who named a trust as the beneficiary of their IRA or 401(k). The reason many people established “pass-through” trusts for their retirement accounts was to pass RMDs to the beneficiaries. But if the trust limits distributions only to RMDs under the presumption that the beneficiaries could receive those payments indefinitely, the inheritors will be in for a rude awakening on the 10th anniversary of the owner’s death. At that point, all remaining funds in the IRA need to be distributed, creating a potentially huge tax hit. For this reason, it is critical to revisit any current estate plan that includes a pass-through trust as a retirement account beneficiary.
Contribution Age Limit Removed for Traditional IRAs
The SECURE Act recognizes that more and more people (including a disproportionate number of presidential candidates) are working well into their 70s and beyond. Older folks who keep working and earning income and also wish to continue saving for retirement by adding to their traditional IRA will be happy with the SECURE Act’s provision raising the contribution age for such accounts.
Previously, no more contributions could be made to a traditional IRA after age 70 ½, even for individuals who were still receiving a paycheck. The SECURE Act repeals that restriction, allowing those who keep working to keep saving.
Start-Date for RMD’s Raised
In addition to eliminating the 70 ½-year-old cutoff for contributions, the act also raises the age at which IRA owners must start taking their required minimum distributions from 70 ½ to 72. If you celebrated your 70 ½ birthday before 2020, however, you will still need to start those RMDs at that time.
Benefits and Credits for Parents and Small Business Owners
Additional retirement provisions of the SECURE Act are of particular note for small business owners and parents. Specifically:
- New parents can take a penalty-free "qualified birth or adoption distribution" of up to $5,000 from a 401(k), IRA, or other defined contribution plan within one year of the birth or adoption that they can use for qualifying child-care expenses.
- The law encourages small-business owners to establish retirement plans for employees by providing them with a tax credit of up to $5,000 for doing so.
Contact Us to Discuss How the SECURE Act Impacts Your Estate Plan and Retirement Goals.
The significant changes to retirement planning ushered in by the SECURE Act may undermine previously effective strategies and require changes to existing approaches. If you need assistance reviewing and revising your estate plan or have concerns about how the SECURE Act impacts you and your heirs, please contact the estate planning and wealth transfer attorneys at Latimer LeVay Fyock.