By David Inabinett, Attorney at Law
The 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. The Act is intended to make it easier for Americans to save for retirement and decrease the percentage of us who outlive our retirement funds. 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 provisions of the SECURE Act include:
- The age limit to begin mandatory distributions from retirement plans has been increased from 70 and a half years of age to 72 in recognition of the fact that people are living longer. This does NOT impact anyone who turned 70 1/2 before January 1, 2020. If you are still working at 70 1/2, your retirement savings may remain untouched for an extra 18 months.
- People of any age may now contribute to a traditional IRA. The prior age cap of 70 1/2 has been removed, so if you are still working and want to build your retirement account and get the tax benefits of a traditional IRA, you may do so. Timing is such that those turning 70 1/2 in 2019 will not be able to claim the IRA deduction for 2019’s taxes but will be able to do so for 2020 and moving forward. In addition, you now have extra time to convert your traditional IRA to a Roth IRA, should that benefit your tax situation. This option may become more important for IRA owners who wish to mitigate the burden of significant taxes upon their beneficiaries/children having to withdraw IRA funds within a much shorter time frame presumably during a time when those younger working beneficiaries may be in a higher tax bracket than their older retired parent/IRA owner.
- There is now a 10 year distribution requirement by which a beneficiary of funds in a retirement account must withdraw the money. 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. There are exceptions to this rule for five (5) “eligible designated beneficiaries,” including (a) surviving spouses; (b) minor children (but only until age of majority at which time the 10 year withdrawal requirement kicks in); (c) disabled individuals; (d) chronically ill individuals; and (e) individuals who are not more than 10 years younger than the IRA owner. We recommend you immediately review your beneficiaries to determine how this change may impact them.
- Trusts may also be impacted 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.
- Small businesses wishing to provide retirement savings options for their employees will now be able to do so more easily. The Act offers a tax credit to help employers offset pension plan startup costs and a three-year credit for employers who automatically enroll employees in the plans. In addition, some of the rules regarding multiple employer plans (MEPs) have been changed to make joining together for quantity discounts easier. It will likely be several years before employees see these plans available to them.
- Part-time employees will now be eligible to participate in retirement plans if they work for an employer at least 1,000 hours in one year or 500 hours per year over the course of three consecutive years.
- The cap for automatic contributions to pension plans has been raised from 10% to 15% of employee compensation, increasing the potential amount saved for retirement.
There are numerous other provisions in the Act that that may be of interest to specific individuals. You may now withdraw up to $5,000 from a retirement savings account to cover the costs of having or adopting a child; healthcare workers receiving difficulty of care payments will now see that compensation treated as earned income for retirement purposes; and the Act also expands 529 education savings accounts to cover additional education-related costs not previously included. 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.
Thanks David. In my trust, if the house sells after my death for more than I paid for it, does that adversely affect the distribution to my 3 named heirs?
Thanks for asking. No, there is no tax effect on this and it is not impacted by any of the changes in the SECURE Act.
My husband passed almost 3 years ago, and I was the beneficiary of his IRA
accounts. Does this new law impact me personally at all?
It does not impact your current RMD requirements but would impact those whom you name as a beneficiary of the remainder of that IRA upon your death.
Does the new law affect those persons already receiving RMD on inherited IRAs? Example- Non spouse and have been receiving distributions for several years and none of the 5 exceptions above.
No. The SECURE Act doesn’t affect those already receiving RMD’s as beneficiaries from a previously deceased IRA owner who died prior to 1-1-2020.