By Daphne Stern, Esq.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect as of January 1, 2020, making significant changes to the laws governing retirement assets. Since retirement assets such as Individual Retirement Accounts (IRAs) and Internal Revenue Code Section 401(k) retirement plans (“401k plans”) comprise a large share of many individuals’ net worth, these changes will have a considerable impact. It is important that you review your retirement assets to determine how you are affected by the SECURE Act and what changes need to be made to ensure that your retirement and estate planning goals are accomplished.
The following highlights some of the changes made by the SECURE Act.
Required Minimum Distributions
Under prior law, when a person attained age 70½, he or she was required to start taking distributions from his retirement accounts by April 1 of the following year. These distributions are called “Required Minimum Distributions” or “RMDs.” Under the SECURE Act, the age for starting RMDs has been increased to 72. This is beneficial since your retirement assets are growing income-tax-free, and in most cases, it is in your best interest to defer making any withdrawals for as long as possible.
This new rule only applies to individuals who attain age 70½ after 2019. Individuals who turned age 70½ in 2019 must start receiving their RMDs in 2020.
Prior to the SECURE Act, employed or self-employed taxpayers were prohibited from making tax-deductible contributions to a traditional IRA after attaining age 70½. The new law eliminates this restriction and allows such IRA contributions to be made by working individuals of any age. This reflects the reality that many people are continuing to work well into their seventies or beyond, and that these tax benefits should be available to them.
While for some taxpayers this may be a significant benefit, there can be a potential downside. If the person plans to make charitable distributions from an IRA, the income tax charitable deduction will be impacted if he or she had made contributions to the IRA after age 70½. This provision has been criticized by some members of the legal community and perhaps will be revised in the future.
The provisions of the SECURE Act which will perhaps most negatively impact retirement assets are those that accelerate the distributions to beneficiaries after an account holder’s death. The SECURE Act is expected to generate over $15 billion in added federal income tax revenue due to these changes.
Under prior law, if a beneficiary of a decedent’s retirement account had been properly designated following IRS guidelines (the “Designated Beneficiary”), then the beneficiary could receive the distributions from the account over the course of his or her lifetime, using his or her life expectancy. This gave the beneficiary a predictable stream of income. Perhaps more importantly, since income tax must be paid on distributions received by the beneficiary, this allowed the beneficiary to spread out such income tax payments over his or her lifetime.
Under the SECURE Act, most beneficiaries will have to receive the entire retirement account balance within ten years of the death of the account holder. There is no longer the ability to “stretch” the payments over the beneficiary’s lifetime to provide a dependable income source or to limit income tax liability.
An important exception to this new ten-year limit is the account holder’s spouse. If a husband or wife survives and is named as the Designated Beneficiary, the account may be paid to the spouse over the course of the spouse’s lifetime or it may be rolled over into the spouse’s own IRA. Upon the spouse’s death, the ten-year rule would apply as to the spouse’s Designated Beneficiaries.
Another exception is the case of a minor child. The payout will be made using the child’s life expectancy until the child attains majority. However, at that point, the ten-year limit applies to the child as well.
Exceptions to the ten-year rule also exist for a disabled or chronically ill individual, as well as for a beneficiary who is not more than 10 years younger than the account owner. It is evident that other than in the case of the surviving spouse, the exceptions are narrow and many beneficiaries will be impacted by the SECURE Act’s changes.
The SECURE Act imposes sweeping changes to the funding and distribution of retirement assets. While I have summarized only a few of the Act’s provisions, it is clear that the impact of the new law is far-reaching. It is imperative that your retirement plans and the beneficiary designations be reviewed in light of the SECURE Act’s provisions and any necessary changes implemented. In addition, there are various estate planning ideas and techniques that may be employed in order to accomplish your goals while complying with the requirements of the new law.