Additional Provisions
The SECURE Act impacts on retirement account holders extend beyond 2020. Some important provisions are as follows:
1. RMDs will start at Age 72: For participants who have not yet begun taking their RMDs, they will now be able to let their retirement funds grow an extra 1.5 years before starting to take their RMD. The SECURE Act pushes back the age that triggers RMDs from 70½ to age 72. Unfortunately, clients who have already begun taking their RMDs, but have not yet attained age 72 must continue to take their RMDs, though not in 2020, as discussed above.
2. Extended Time to Make IRA Contributions: The SECURE Act repealed the rule that prohibited taxpayers who were age 70½ and older from making contributions to traditional IRAs. For clients who continue to work into their 70s and older they may continue to contribute to their IRAs as long as they are working.
3. Ability to Use Retirement Account for Birth or Adoption of Child Without Penalties. Following the birth or adoption of a child, a new parent or parents may now withdraw up to $5,000 each from his or her account without incurring the usual 10% penalty on early withdrawals. Additionally, parents may make this withdrawal up to one year after the birth of the child and may put the money back into the retirement fund at a later date. When adopting a child, the penalty-free withdrawal is available as long as the adoptee is under 18 years of age, a spouse’s child, or is physically or mentally incapable of self-support.
4. Expansion of Annuity Information and Options. The SECURE Act now requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants. The lifetime income disclosure statements will show plan participants how much money they could get each month if their total 401(k) account balance was used to purchase an annuity. Additionally, the SECURE Act makes it easier for 401(k) plan sponsors to offer annuities and other lifetime income options to plan participants.
Considerations For Post-Mortem Planning
One of the biggest changes caused by the SECURE Act for plan holders dying after December 31, 2019, is the end of the “stretch” IRA as we know it.
Prior to the enactment of the SECURE Act, qualified beneficiaries of inherited IRAs were able to use their lifetime, rather than the deceased owner’s, lifetime as the basis for making the RMDs. The SECURE Act still allows spouses, minor children, disabled beneficiaries (within the definition of IRC §72(m)(7)), chronically ill beneficiaries (within the definition of IRC §7702B(c)(2)), and beneficiaries less than 10 years younger than the plan holder to stretch the RMDs over their lifetimes.
For all other beneficiaries, such as non-minor children or a trust, the entire retirement plan must be distributed out to the beneficiary by the end of the 10th year after the plan holder’s death. It should be noted that the plan does not have to be distributed pro rata over the 10 years and may instead be taken out as lump sums as the inherited beneficiary needs so long as it is entirely withdrawn within 10 years. Distributions are taxed as ordinary income in any year(s) that the beneficiary withdraws from the plan.
Given these changes, there are pros and cons to naming a trust or individual(s) as a beneficiary, especially when considering income tax ramifications and family dynamics. For example, a plan holder may want to delay a beneficiary from receiving retirement plan funds for as long as possible, but if a beneficiary receives the entire retirement fund in one lump sum at the end of 10 years he or she may be stuck with a hefty income tax bill or even be pushed into a higher tax bracket. On the other hand, if a retirement plan is distributed out over 10 years to mitigate the income tax responsibility it may result in a beneficiary having access to funds much sooner than the plan holder anticipated or wanted.
If you have any questions about what strategy might be best for your family and tax situation, such as leaving your retirement plans to a trust, please reach out to us and make an appointment to go over your current plan.
Matthew J. Leonard is a director at Boston law firm Rackemann, Sawyer & Brewster, where he focuses his practice on the areas of estate and gift planning, estate and trust administration, charitable planning, probate litigation and business succession planning. He assists individuals and families in planning and carrying out comprehensive gift strategies and estate plans to transfer and protect family wealth in a tax-efficient matter tailored to the client’s wishes.