On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), and it became effective on January 1, 2020. The SECURE Act has made several changes to the administration of retirement accounts. One big change is that it increases the required beginning date for required minimum distributions (“RMDs”) from your individual retirement accounts (“IRAs”) from 70 ½ to 72 years of age. Another change is that the SECURE Act eliminates the age restrictions for contributions to qualified retirement accounts.
By far, the biggest impact the SECURE Act has on retirement accounts is the requirement that most designated beneficiaries of an inherited retirement account withdraw the entire balance within ten years of the account owner’s death. This eliminated a beneficiary’s ability to stretch distributions from an inherited IRA over the beneficiary’s own life expectancy. This shorter time frame for taking distributions will likely cause income tax problems for beneficiaries as a larger distribution can push them into higher tax brackets.
Another concern with inherited retirement accounts being cashed out by the ten-year mark is that once they are cashed out, the money is no longer protected from a beneficiary’s creditors, future lawsuits, or a divorcing spouse.
There are exceptions to the new ten-year withdrawal rule. The beneficiaries who meet the requirements of the exceptions can still withdraw the inherited IRAs over their life expectancy. These exceptions include spouses, beneficiaries who are not more than ten years younger than the account owner, disabled children, and chronically ill individuals (there are requirements that have to be met to qualify as a disabled child or chronically ill individual). Minor children are also exempt from the ten-year rule until they turn eighteen. This means that the ten-year rule goes into effect when they turn eighteen, and their inherited retirement assets must be distributed in their entirety by their 28th birthday.
There are a few aspects of your estate plan that should be reviewed in light of the new SECURE Act:
If your revocable living trust or standalone retirement trust currently handles the distribution of your retirement accounts, the trusts may have included “conduit” provisions. Conduit provisions, under the old law, allowed the trustee to distribute the required minimum distributions (RMDs) to the trust beneficiaries, allowing the continued stretch based on the beneficiaries age and life expectancy while protecting the balance from creditors and divorcing spouses, who could only typically go after the RMDs once they were actually distributed. With the SECURE Act, a conduit provision will no longer work because of the ten-year withdrawal rule. There is an alternative called an “accumulation” trust or provision that also allows the retirement assets to be collected and RMDs to be distributed to beneficiaries, but has a different taxation scenario.
If you don’t already have a trust handling your retirement accounts, you might want to begin that discussion. Standard beneficiary designation forms for retirement accounts may not take into account your estate planning goals or any unique beneficiaries that you might have. A trust can address the new SECURE Act rules while also providing continued protection for your beneficiaries.
It is also a great time to review those beneficiary designations on your retirement accounts. If you have had ANY life changes: divorce, death of a spouse, marriage, birth or death of a child, etc., you need to review and likely update your beneficiary designations. Additionally, if your retirement account has changed administrators at all since you opened an account, you should review your beneficiary designation. Just because you had a designation filed with the old company does not mean that the new company accepts it, or that it automatically carried over.
Because of the SECURE Act’s tax implications on your beneficiaries, it is a good time to review any charitable wishes you might be able to make come true using those retirement accounts. It may also be a good time to review your own RMDs because you may be able to absorb some of the taxes while you are retired instead of the possibility of pushing your beneficiaries into the highest tax bracket during their highest earning potential period.
The SECURE Act has created the need for everyone to review their estate plans and beneficiary designations. Make sure that your plan is current and consistent with your wishes and goals.
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