The SECURE Act:
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020. The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes: (1) it eliminates the age restriction for contributions to qualified retirement accounts; (2) it increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age; and (3) it requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.
The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for. Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated. Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now.
Key Point Summary:
Repeal of Maximum Age for Traditional IRA Contributions - repeals the maximum age for contributions to traditional IRAs
The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70 1/2. As Americans live longer, an increasing number continue employment beyond traditional retirement age. Contributions can be made to your IRA after you turn 70 1/2 as long as you are still working.
Increase in Age for Required Beginning Date for Mandatory Distributions - increases the required beginning date (RBD) for required minimum distributions (RMDs) from 70 ½ to 72
Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. However, the age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy.
Modifications to Required Minimum Distribution Rules - requires most non-spouse beneficiaries to withdraw inherited account balances within 10 years of the account owner’s death
The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals (other than the surviving spouse of the employee/IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee/IRA owner, or child of the employee/ IRA owner who has not reached the age of majority) are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death. IRA's can no longer the "stretched" over the lifetime of the beneficiary - the IRA has to be completely paid out within 10 years of the death of the IRA owner.
Next Steps: what should you do now?
Check the beneficiary designations of your retirement accounts / 401k / IRA - now is the time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly. If your intention is for the retirement account to go into a trust for a beneficiary, the trust should be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, he or she should be named. Contingent beneficiaries should be listed as well.
Please contact us so we can review your beneficiary designations and your trust documents to ensure everything is correct.