By David Inabinett, Attorney at Law
The original SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) was signed into law December 20, 2019, and most of its provisions became effective January 1, 2020. That law has been updated, with the changes referred to as SECURE 2.0.
The original SECURE Act and its subsequent rules are intended to make it easier for Americans to save for retirement and decrease the percentage of us who outlive our retirement funds. The Act also ensures taxes are paid on pretax retirement funds in a timelier fashion. While the purpose of the Act is positive, some of these changes may result in unanticipated tax bills for beneficiaries who were previously able to defer or “stretch” the withdrawal of such accounts over an entire life expectancy.
The key updates to the SECURE Act 2.0 include:
- The age limit to begin mandatory distributions from retirement plans (RMDs) has once again been increased. In 2023, that age was 73; in 2033, the age for mandatory distributions will increase to 75. Note that if you turned 72 prior to 2023, you must continue to take RMDs as defined under the prior rule.
- If you have a Roth IRA in an employer retirement plan, beginning in 2024 you no longer have to take a required minimum distribution. Since taxes have already been paid on Roth accounts, the funds may remain there until you choose to take them out.
- While in past years the penalty for failing to withdraw the required minimum distribution was 50% of the amount not taken, beginning in 2023 that penalty drops to 25%. Individuals can further reduce the penalty (to 10%) by taking the “missed” amount and filing a corrected tax return in a timely fashion.
- The rules for catch-up contributions have also changed slightly. Currently, individuals ages 50+ may contribute an extra $1,000 to their IRA as a “catch-up” contribution. As of 2024, that limit will be indexed for inflation, meaning it may be adjusted each year. In 2025, those ages 60-63 may increase their catch-up contributions to workplace plans from the current $7,500/year to $10,000/year. And in 2026, individuals earning more than $145,000/year will only be permitted to make catch-up contributions to a workplace plan in the form of a Roth IRA (after tax dollars).
- The original SECURE Act gave small businesses wishing to provide retirement savings options for their employees an easier option to do so. In 2025, small businesses choosing to offer these options must automatically enroll eligible employees with a minimum contribution of 3%. In addition, the Act allows these accounts to be portable so employees may move them if they change jobs. SECURE 2.0 has added a second tax benefit. Now small employers (generally with under 100 employees) may claim tax credits to help offset pension plan startup costs as well as contribution costs.
- Multiple employer plans (MEPs) allow small businesses to join together for quantity discounts when setting up retirement savings plans. SECURE 2.0 closed a loophole in the original law so that 403(b) plans are now eligible.
- For those not yet of retirement age, SECURE 2.0 has added some benefits, as well. These include a rollover option for 529 plans, an emergency savings option, and an approved employer match on student loan payments to encourage those repaying these loans to also save for retirement.
The original SECURE Act put in place a 10-year distribution requirement by which a beneficiary of funds in a retirement account must withdraw the money (with some exceptions). This requirement remains with SECURE 2.0. In the past, beneficiaries were allowed to “stretch” the minimum distribution requirements based on their own age, meaning if they inherited funds from a deceased parent’s IRA at the age of 45, for example, they could withdraw the required minimum amount only each year for their life expectancy, thus allowing for minimal taxation upon the required minimum distributions and allowing the principal held within the account to grow on a tax-deferred basis, typically out-pacing the minimum required distribution amounts. With the change in the law, under this same scenario, the beneficiary will have 10 years (until they are 55 years old) to withdraw all of the funds and pay the applicable tax. This will have significant tax implications for the beneficiary who may still be working and in a higher tax bracket than if they were withdrawing the IRA and paying the applicable tax after retirement.
Trusts may also be affected by this 10-year distribution requirement. Many trusts were designed to limit how much could be withdrawn, for example, only the minimum required distribution would be paid to the beneficiary each year. The language in the Act may cause a conflict with terms of your specific trust. For example, if the trust was created for an individual who does not meet the definition of an “eligible designated beneficiary,” then the former “required minimum distributions” called for in a “conduit” style trust will no longer apply because such beneficiaries are now merely required to withdraw the entire IRA within 10 years of the owner’s death. In cases where a beneficiary does not meet the definition of an “eligible designated beneficiary” entitled to maintain the “stretch” for RMD’s, an “accumulation” trust would be more appropriate if a trust is warranted at all for such proceeds. I recommend you sit down with your attorney and review all trusts to ensure they are not impacted by these changes.
Whether you are an individual or employer, the terms of the SECURE Act (original and revised) can be complex. You may wish to review the Act or speak to your estate planning attorney or financial advisor about how the SECURE Act may impact you and your prior estate planning and IRA beneficiary designations. Traditional practices of minimizing withdrawals from IRAs due to the stretch and opportunities for growth of such accounts which beneficiaries would have previously enjoyed should be reviewed and reconsidered in light of changes under the Act. Contact us today to schedule an appointment with an estate planning attorney at Brinkley Walser Stoner.