On December 20, 2019 Congress passed the “Setting Every Community Up for Retirement Enhancement Act” (the SECURE Act) as part of the $1.7 trillion spending legislation that took effect January 1, 2020. The SECURE Act significantly changes the rules regarding withdrawals from retirement accounts – particularly with “Stretch IRAs” – and makes some changes in the rules regarding contributions to such accounts.
The following is a synopsis of some of the major changes to retirement planning effectuated by the SECURE Act:
Extending the Required Minimum Distribution beginning date to age 72. The “required beginning date” – that is, the date following which a retirement plan owner must begin taking withdrawals known as “required minimum distributions” (RMDs) – has been increased from age 70 ½ to age 72, for those people who have not already reached age 70 ½ by December 31, 2019. So, the first RMD must occur by April 1st of the year after attaining age 72. This change will allow retirement savings to be tax-deferred for an additional one to two years lasting longer for retirement.
Limiting the “Stretch” for post-death Required Minimum Distributions from inherited retirement accounts. Under pre-2020 rules, upon the death of a retirement plan participant, the balance of his/her retirement account had to be distributed in annual instalments over the life expectancy of his/her “designated beneficiary” or more rapidly. If the benefits were not left to a designated beneficiary, the inheritor had to withdraw the benefits within 5 years after the participant’s death if the participant died before his/her required beginning date or (otherwise) in annual instalments over what would have been the remaining life expectancy of the participant if he/she had not died. A “designated beneficiary” was (and still is) defined as an individual or group of individuals named as beneficiary by the participant or by the plan, or a trust so named as beneficiary if the trust met the IRS’s requirements to be considered a “see-through trust.” If a designated beneficiary died before the end of his life expectancy payout period, the next beneficiary in line stepped into the decedent’s shoes and could withdraw over the remaining life expectancy of the original designated beneficiary.
Under the SECURE Act, most Designated Beneficiaries will have to take distributions from an inherited retirement account within a ten (10) year period after the plan owner’s death, instead of stretching the distributions over their life expectancies. This tax generating provision will accelerate the depletion of inherited retirement accounts. However, there are exceptions to this rule for “Eligible Designated Beneficiaries”, such as surviving spouses, minor children, individuals with disabilities or chronic illnesses, and those who are less than ten (10) years younger than the deceased retirement account holder. Trusts for individuals with disabilities may qualify for the life expectancy method under the SECURE Act.
Repealing the age limit for Traditional IRA contributions. People working past age 70 ½ are now allowed to continue contributing to Traditional IRAs, as is permitted with 401(k) plans and Roth IRAs.
Expanding access to annuities in retirement accounts. In-plan annuities inside of a 401(k) plan are permitted as investments, which will allow more sources of retirement income.
As part of retirement planning under the SECURE Act, it is important to analyze the projected RMDs and understand when to start and the best way to take the RMD in order to minimize income taxes. For example, Qualified Charitable Contributions from an IRA directly to a charity will satisfy the RMD requirement while avoiding income tax. Roth IRA conversions is another strategy that can be implemented to move taxable IRA funds into Roth IRAs which are not subject to RMDs at age 72, providing more control over income.
For individuals with disabilities or chronic illnesses, this is an opportunity to have inherited IRAs paid out to a “Supplemental Needs Trust”, thus allowing the individual to maintain government benefits and stretch the IRA over the individual’s lifetime. A trust for a disabled or chronically ill person will qualify for the stretch-out under the SECURE Act. The trust can’t have any current beneficiaries who aren’t disabled or chronically ill. For this purpose, “disabled” has a meaning similar to the Social Security definition. We assist clients with retirement planning by drafting trusts that can serve as beneficiaries of retirement plans and helping draft beneficiary designations to carry out clients’ wishes for their beneficiaries. Call us today if you need assistance with such planning.