All the years you spend planning for retirement and all of the thought and foresight you put into your comprehensive estate plan can be upended by the stroke of a pen. That is precisely what occurred when the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law at the end of 2019. Containing some of the most significant and impactful changes to retirement planning in over 16 years, the SECURE Act should prompt anyone planning for their golden years to revisit and likely revise their meticulously crafted retirement strategy to ensure it still comports their goals.
The SECURE Act contains significant modifications to age thresholds, required minimum distributions (RMD), and lifetime income options that flow from retirement accounts. Here are some of the most notable alterations in the law that all people planning for retirement – and their heirs – need to know:
“Stretch” Provision Eliminated
Before the SECURE Act, the law required that non-spouse beneficiaries of IRAs and other defined-contribution plans like 401(k)s take required minimum distributions from those inherited accounts but could “stretch” distributions over the course of their lifetimes. Stretching out distributions over an extended time allowed beneficiaries to mitigate their tax liability for each withdrawal while the funds still in the account continued to grow on a tax-deferred basis.
That approach is still available for non-spouse beneficiaries of individuals who died before January 1, 2020. But most heirs of anyone who passes away after that date no longer have the “stretch” option. Rather, they now only have ten years from the date of death to distribute and liquidate the assets in those retirement accounts. On the plus side, there is no longer any RMD requirement.
Some retirement account beneficiaries can still stretch their distributions past the new ten-year limit, including:
- the account owner’s surviving spouse;
- a child of the account owner who has not reached the age of majority;
- a person who is disabled or chronically ill as defined by the Internal Revenue Code;
- a beneficiary who is not more than ten years younger than the account owner.
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 before the SECURE Act.
Those Who Named a Trust as Beneficiary Need to Be Particularly Careful
Many people name a trust as the beneficiary of their IRA or 401(k). One reason for establishing a “pass-through” trust for retirement accounts was that it allowed account holders to pass RMDs down to their beneficiaries, allowing the inheritors to receive income indefinitely. But many such trusts limit distributions only to RMDs, which now no-longer-exist. This sets up a rude awakening for beneficiaries on the 10th anniversary of the owner’s death when any remaining funds in the IRA or other retirement account need to be distributed, creating a potentially huge tax hit. For this reason, it is crucial that anyone who has named a trust as the beneficiary of their retirement account revisit their current estate plan and modify it to avoid this scenario.
Contribution Age Limit Ended for Traditional IRAs
An increasing number of Americans keep on working well into their 70s, and the SECURE Act recognizes this reality. Previously, people could not make any more contributions to a traditional IRA after age 70 ½, even if they were still earning a paycheck. The SECURE Act eliminates that restriction, allowing those who keep working to keep saving.
RMD Start-Date 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.
Credits and Benefits for Small Business Owners and Parents
Additional retirement provisions of the SECURE Act are of particular interest for small business owners and parents. Specifically:
- 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.
- 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 costs.
Contact Kreis Enderle With Your SECURE Act Questions or Concerns
What once were effective retirement and estate planning strategies may no longer be so under the SECURE Act. If you have questions about how the SECURE Act may affect you and your heirs or need assistance reviewing and revising your estate plan, please contact one of Kreis Enderle’s estate planning attorneys today.