At the tail-end of 2019, Congress enacted the SECURE Act, short for “Setting Every Community Up For Retirement Enhancement Act.” The Act holds provisions for both sponsors and participants of retirement plans with qualified funds, like IRAs or 401k plans. The Act is generally favored for promoting financial security and retirement savings for plan owners. However, there are some significant disadvantages for distributing retirement plans after the original account owner’s death in some cases. Here are the key estate planning considerations that impact plan owners:
• Required Minimum Distributions (RMDs): Plan owners must now wait until age 72 to begin drawing RMDs. Before the Act, owners had to begin drawing RMDs at age 70 ½. If a plan owner started taking RMDs before 1/1/2020, the Act has no change for those individuals.
• Penalty-Free Withdrawals for Birth or Adoption: Plan owners can now withdraw up to $5,000 without penalty within one year of a birth or adoption.
• Contributions to IRAs at Any Age: The Act now allows plan owners to contribute to a traditional (non-Roth) IRA at any age if the owner is still working. Before the Act, an owner could not contribute to an IRA after age 70 ½. An accountant or financial advisor can guide these recommendations to maximize any tax advantages.
• Stretch Out IRA Plans Eliminated: With limited exceptions, under the Act an inherited IRA must now be distributed over 10 years or less after the death of the original account owner. Surviving spouses, minors, and some disabled individuals are some exceptions to the 10-year rule and are still permitted to take inherited IRA distributions longer than 10 years; the 10-year rule would then apply upon their death. Typically, a minor who inherits an IRA will likely have to accept distributions (and pay taxes on the distributions) before age 28. Before the Act, it was possible to “stretch out” the distribution of an inherited IRA over the life of a beneficiary by designating as a beneficiary a trust with conduit provisions. This new aspect of the Act holds significant, and somewhat detrimental, changes for the amount of taxes a beneficiary could pay upon receiving the assets, the timing a beneficiary can receive the assets, and the ability to protect the assets from a beneficiary’s creditor. If an IRA or other retirement plan names a trust as a beneficiary, the Act introduces numerous considerations for structuring an estate plan that maximizes plan benefits and also protects beneficiaries.
With the SECURE Act in place, it is imperative to review your retirement plan, tax plan, and estate plan with your trusted financial advisor, accountant, and estate planning attorney. You will likely need to review or revise your plan in these circumstances:
• If your estate plan names a trust as a beneficiary of your retirement plan with the goal of holding assets in trust for a beneficiary. It will be necessary to consider the Act’s practical effects on your trust and whether or not the trust will continue to meet your goals for the beneficiaries.
• If you named a much younger person as a beneficiary of a retirement plan with the goal of stretching out the plan over the life of the beneficiary.
• If your estate plan is comprised of specific timed distributions to a beneficiary premised upon the goal that the beneficiary could take RMDs for their lifetime.