Effective January 1, 2020, the “Setting Every Community Up for Retirement Enhancement Act” or “SECURE ACT” will effect both participants and beneficiaries of retirement accounts. In particular, the SECURE ACT radically changes the estate planning landscape for your retirement benefits.
The purpose of the SECURE ACT is to motivate and help Americans save for retirement. Previous generations often had a pension through an employer that would provide a stream of income to the employee during retirement. Over time, pensions presented their own set of problems. Few employees today will earn a pension through their employer. Today, most Americans will save for retirement using a retirement account, such as a 401(k) or an IRA. For purposes of this article, I will use the broad term of “retirement accounts” to describe these accounts. When a person contributes to a retirement account, the money contributed is not immediately subject to income tax. That income tax will be paid later when the person begins drawing on that account in retirement as a source of income. If the person dies before they have withdrawn all the money in their retirement account, then their designated beneficiaries will pay the income tax on the remaining amounts (with certain exceptions).
The SECURE ACT makes several significant changes to the Internal Revenue Code section pertaining to how funds are withdrawn from these retirement accounts by the retirement account owner or designated beneficiary. The SECURE ACT makes other significant changes, however, in this article, I will focus on a couple of the changes that may affect your estate planning.
The Required Minimum Distribution Age Increased.
Previously, at age 70 ½ a person was required to take their “required minimum distribution” (RMD) from their retirement account annually. Now, the SECURE ACT increased the age to 72 to take the “required minimum distribution”.
Contribution Limits for Traditional IRAs Changed.
Previously, individuals over the age of 70 ½ who were still working, were unable to contribute to a Traditional IRA. Now, the SECURE ACT allows those over the age of 70 ½ who are still working to contribute to a Traditional IRA.
The “Stretch” IRA is Limited.
Previous law allowed all beneficiaries to inherit a retirement account and take distributions from the account over their lifetime. This allowed the beneficiary to pay income tax on distributions as the distributions were received over time. This was known as the “stretch IRA rule” because the beneficiaries were able to stretch taxable distributions over time to minimize the income tax implications. The SECURE Act has eliminated the life expectancy payout, with a few exceptions. Now, the SECURE Act requires that any designated beneficiary (with a few exceptions) must take all distributions from the retirement account within 10 years of the death of the plan owner or participant. For example, if a parent passes away in 2020 and leaves an IRA to an adult child, the account must be fully distributed to the child by December 31, 2030. The child will owe income tax on distributions as they are received, at the child’s individual tax rate. There are a few exceptions: a surviving spouse (who can also roll over to his/her own IRA); individuals not more than 10 years younger than the account owner; minor children of the account owner (until age of majority); and disabled and chronically ill individuals (subject to meeting the criteria and being certified as such).
The significance of the SECURE ACT will vary for each person based on their specific designated beneficiaries, assets held in retirement accounts, and estate planning objectives. For many, their retirement accounts are a significant part of their estate. Everyone should take this as an opportunity to meet with your estate planning attorney, CPA, and financial advisor to consider the beneficiary designation that best accomplishes your specific estate planning objectives. This may be an opportunity to utilize different planning strategies, such as planning with trusts, a Roth IRA conversion, or a Charitable Remainder Trust.
We at Bivens & Associates, PLLC will be monitoring the SECURE ACT and providing additional resources and education. Contact us today to discuss how the SECURE ACT may affect you and those you care about. We offer a complimentary 1 hour consultation with one of our attorneys to discuss your personal estate planning goals and review of current estate planning documents, if any, along with all beneficiary designations.
*This article is not a comprehensive summary of the entirety of the SECURE ACT. This article does not provide specific legal or tax advice, whatsoever. Please consult with a professional regarding any specific questions or implications.
– Megan Selvey, Esq.