The Setting Every Community Up for Retirement Enhancement (SECURE) Act (“the Act”), was signed into law on December 20, 2019 and became official on January 1, 2020. The Act has greatly altered the treatment of IRAs and other beneficiary designation retirement plans. This includes both while the plan participant is alive and even after death. This article will explain significant factors that can affect an individual’s potential to collect retirement assets, transfer those assets to heirs and other beneficiaries, and execute an appropriate estate plan to maximize his or her goals.
What are the changes to individuals’ required minimum distributions (RMDs)? The Act increases the age when an individual must begin taking required minimum distributions (RMDs) from 70½ to 72. This change applies beginning with retirement account owners who will reach age 70½ on or after January 1, 2020, which means that if the owner turned 70½ prior to January 1, 2020, he or she must continue to take RMDs and cannot delay them until age 72. By way of example, a wife who turned 70½ on December 31, 2019, must start taking her RMDs now, while her husband, who turned 70½ on January 1, 2020, will not have to take RMDs until he turns 72, in 2021. Participants can still choose to take distributions before age 72 (if over age 59½).
Why am I hearing about “stretch” IRAs? The Act eliminated the “stretch” option for most beneficiaries of IRAs and other qualified retirement plans (such as 401(k) and 403(b) plans) who inherit from decedents who die after December 31, 2019. Historically, many beneficiaries had the ability to stretch the RMDs over their lifetimes, minimizing income tax exposure for beneficiaries and allowing assets to grow tax-free inside the plan for an extended period of time. The Act eliminated this option for most beneficiaries and now requires that accounts be distributed to the beneficiary within 10 years of inheriting the asset.
Please note, however, that the Act did not change the rollover options available for a surviving spouse, and as discussed below, exempted spouses and certain other beneficiaries from the new 10-year payout rule.
Under the Act, RMDs are no longer mandatory on an annual basis, but the entire account must be distributed to the beneficiary within the 10-year period after the decedent’s death. For example, it is now possible to defer distributions from the retirement plan in years one through nine and wait until year 10 to take the entire plan balance.
In some cases, a beneficiary qualifies for an exception and can still “stretch” his or her distributions beyond the usual 10-year period. In order to extend distributions beyond the 10-year period, a beneficiary must be:
• a surviving spouse, who is still allowed to rollover an IRA to their own account;
• a disabled or chronically ill individual;
• a minor child, who cannot avoid the 10-year distribution requirement, but is permitted to defer
• distributions to the 10-year period that begins when she or he reaches the age of 18; or
• a beneficiary who is less than 10 years younger than the decedent (e.g., a younger sibling of the account owner).
Due to the new 10-year distribution requirements, individuals who had previously named “conduit” or “see-through” trusts as the beneficiaries of their retirement plan assets should review their estate plans to make sure that their plans will operate as intended under the new rules. Depending on the terms of each trust, “conduit trust” provisions may require acceleration of mandatory distributions of the retirement plan funds to the trust’s beneficiaries. As a consequence, creditor protection provisions may not be as effective as intended. However, modification of an existing trust’s retirement plan provisions may be possible to preserve the original intent and planning goals of naming the trust as the beneficiary of the distributions. Conversely, some individuals who did not name a trust as the beneficiary of their retirement plan assets should consider revising their beneficiary designations to incorporate a trust as a primary or contingent beneficiary.
What are the changes to the age limit for IRA contributions? Previously, contributions to an IRA were prohibited after age 70½. However, the Act will now allow individuals over age 70½ to make IRA contributions, as long as the individual or his or her spouse has qualifying employment income.
Are there any changes to qualified charitable distributions from an IRA? Individuals over age 70½ can still transfer up to $100,000 per year to qualified charitable organizations from an IRA, with the amounts transferred counting toward the individual’s RMD. The Act provides that the total distributions made after 70½ will be reduced by any deductible contributions made after that age.
How will the Act impact distributions upon the birth or adoption of a child? Upon the birth or adoption of a child, the Act permits an individual to take a qualified distribution of up to $5,000 from an applicable eligible defined contribution plan or IRA. This distribution is not subject to the 10% early withdrawal penalty.