How does the new SECURE Act impact my Estate Plan?
On January 1, 2020, the SECURE Act (“the Act”) became law and some of the provisions of this Act could have a very real effect on your estate plan.
Specifically, it brings significant changes to the transfer and taxation of your retirement plans after death.
The purpose of the Act, as stated, is to encourage retirement savings, and it does that with two keys changes to current:
- Under prior law, the owner of a retirement account had to begin taking required minimum distributions (RMDs) from that account in the year that the owner reached age 70 ½. Under the new law, that age is extended until age 72. However, this only applies to individuals that turn age 70 ½ in 2020 or later- if you turned age 70 ½ in 2019 then you were still required to take your first RMD in that year and must continue doing so.
- Under the new law, an individual with earned income can continue contributing it to an IRA even after age 72. We are living longer and working longer and so for as long as you continue to earn income you can contribute to your IRA. Under prior law no contributions could be made to an IRA after this date.
These are both nice benefits for those that work into their 70s. However, as with most acts of Congress, where one hand is giving the other is taking, and in this case the take comes in the form of disallowing stretch provisions of inherited IRAs.
Under prior law, a beneficiary inheriting an IRA or other retirement account had to begin taking RMDs from the inherited funds by December 31 of the year following the account owner’s date of death; however, the beneficiary could “stretch” these distributions out by taking them annually over their own life expectancy.
A beneficiary age 50 receiving an IRA from a deceased parent might be able to stretch the distributions from the IRA, as well as the income tax liability on the funds distributed, over 30 or more years. This created smaller distributions and therefore smaller annual tax liability that could often be offset with other deductions.
However, the SECURE Act now requires all funds held in the deceased owner’s IRA to be distributed to the beneficiary(ies) of the IRA within 10 years. There are no RMDS, but the account must be completely distributed, and the taxes paid on the distributed funds, within 10 years of the account owner’s date of death.
There are some notable exceptions:
- Spousal rollover still applies, and a surviving spouse may receive a deceased spouse’s IRA and treat it as their own.
- If a minor is named as a beneficiary, the 10-year clock doesn’t start running until age 18.
- Disabled beneficiaries, and beneficiaries less than 10 younger than the deceased owner, are still allowed the “stretch” provisions.
As with any new law, the Act will create some new planning considerations for retirement accounts. With the stretch provisions taken away, some of our clients may want to look at making any desired charitable gifts from retirement plans rather than trust assets, or increasing the number of beneficiaries receiving from each plan in order to dilute the income tax burden to any one individual.
As always, if you feel this might apply to you, or wish to discuss further, please give me a call and we can discuss.