In the final days of 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. As of January 1, 2020 the SECURE Act is in effect and has numerous provisions which will need to be taken into consideration when instituting the most effective estate plan. The SECURE Act, among other things, results in a major tax reform relating to retirement planning and retirement accounts.
The first major change relates to the “stretch” provision of IRAs. Under the prior law, a non-spouse beneficiary could take distributions from the IRA over their life expectancy. The SECURE Act eliminates the “stretch” provision and will now require the non-spouse beneficiary to withdraw the entire balance of the IRA within 10 years of the account owner’s death. There are no distribution requirements over the 10 years; beneficiaries may take regular disbursements from the IRA as they see fit or liquidate the entire account at one time, but the account must be emptied by the end of the 10 years.
Beneficiaries may structure their withdrawals in order to minimize the tax consequences but it will likely require more planning than was previously necessary.
The SECURE Act does classify certain groups of individuals who are not subject to the 10-year rule. These individuals are referred to as “Eligible Designated Beneficiaries” and they are: spousal beneficiaries; disabled beneficiaries; chronically ill beneficiaries; individuals who are not more than 10 years younger than the decedent; and minor children of the IRA owner – but only while they are minors. Minor children will be able to take distributions based on their life expectancy only until they reach the age of majority, at which time they will become subject to the 10-year rule.
Another major change is the age at which individuals must begin taking their Required Minimum Distributions (RMDs). Under the prior law, individuals were required to begin taking RMDs at 70½ years old. The new law has shifted the age to 72 years old. The SECURE Act retained the ability of individuals to delay taking their RMD until April 1st of the year following the year in which they are required to begin taking distributions. However, the change to the required beginning date for RMDs only applies to those who turn 70½ in 2020 or later. An individual who turned 70½ before 2020, even though they are not yet 72, will be required to take their RMDs in 2020 and every year following.
Finally, the last major changes relate to the contribution age for IRAs. Under the prior law once an individual reached the year in which they turned 70½ they were prohibited from contributing to their traditional IRA. The SECURE Act removes the age limit and provides that individuals of any age may contribute to their IRA as long as they have incoming compensation. In effect, this change benefits those that are 70½ and older who are still working.
Alongside the above-mentioned IRA changes, the SECURE Act also establishes a bigger tax credit incentive for small businesses to offer retirement plans to their employees; includes an allowance for qualified births or adoptions to receive a penalty-free distribution; and creates a Safe Harbor for employers with retirement savings plans who allow employees to convert their savings into annuities.
These changes will impact nearly every estate plan for individuals with Retirement Accounts. If you have any questions about this Legal Briefing and how the SECURE Act may affect you, please contact any member of the Firm at (585) 730-4773. Please note that any embedded links to other documents may expire in the future.
This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2020 Law Offices of Pullano & Farrow PLLC