Those of you who have accrued sizeable retirement plans or IRA accounts with the hopes of retiring well and leaving a nest egg for your beneficiaries need to know the facts about the new SECURE Act of 2020. Effective on January 1, 2020, the law expands opportunities for people to increase their retirement savings and significantly modifies the required minimum distribution (RMD) rules.
The law changes could require proactive planning and alterations to your estate plan to protect the retirement you deserve and the legacy you want to leave.
Before the SECURE Act, if you were older than 70.5 years old and were retired, you could not continue to contribute to a traditional IRA, and you were required to start taking RMDs. Under the new law, the maximum age for contributions to traditional IRAs was eliminated, and the age to begin taking RMDs, the Required Beginning Date (RBD), was pushed out to age 72. These changes give you additional time to contribute to your traditional IRA, contribute to an employer retirement account (if you aren't retired), make Roth IRA conversions, and grow your accounts before RMDs begin. Proper planning during this time can help you receive valuable tax deductions and save for the future.
As under prior law, if you are still working, you can postpone taking RMDs from your employer's plan until after retirement. This law change doesn't apply to anyone who reached age 70.5 before January 1, 2020.
In the past, when a retirement/IRA account was left to a beneficiary, that person could potentially stretch out their RMDs over their life expectancy to achieve tax-deferred growth and space out their income tax obligation. In a major change to the law, most IRA beneficiaries will now be required to distribute their entire inherited account within 10 years of the year of death of the owner. This will not affect anyone who has already received their inheritance or where the account owner died before January 1, 2020.
It is important to note that this law change will not apply to "eligible designated beneficiaries." These are the surviving spouse, minor children of the deceased account owner, beneficiaries who are no more than 10 years younger than the deceased account owner, and a disabled or chronically-ill individual as defined by the law. These eligible designated beneficiaries can generally distribute the inherited account over their life or life expectancy, the same as before. For minor children, once they reach the age of majority, their 10-year countdown to distribute the account begins. However, one could still potentially be considered a minor if they have not completed a "specified course of education" and are under the age of 26, allowing for a postponement of sorts while attending college, for instance.
The RBD age increase affects "non-designated beneficiaries" as well. These are beneficiaries where a life expectancy cannot be determined, such as non-qualified trusts, charities, the decedent's estate, or a minor child's guardianship estate. Under both the old and new rules, if the account owner dies before their RBD, which is now age 72, they must receive all of the benefits within five years. If the account owner dies after the age of 72, the non-designated beneficiary may choose to have the benefits paid out on the same payout schedule as were being paid to the owner.
Prior to the SECURE Act, certain trusts could be considered "designated beneficiaries," where the age of the oldest beneficiary was used to determine the distribution options. With the new changes, a beneficiary of a trust who would otherwise typically qualify as an eligible designated beneficiary could lose the opportunity to use their life expectancy to calculate RMDs and instead be required to distribute the account within 10 years.
As you can see, the enactment of the SECURE Act means big changes to estate planning and can have significant impacts on those who have retirement plans or IRA accounts, especially if they have beneficiary designations to revocable or irrevocable trusts. It has substantially raised the analysis level when reviewing priorities and balancing the respective benefits and consequences of choosing to use one strategy over another. Despite the potential tax consequences, priorities such as marital protection, bloodline protection, and asset protection still warrant consideration and need to be discussed with a professional.
Whether or not you have an estate plan in place, if you have a qualified retirement plan or IRA you are highly encouraged to make an appointment with Sundvick Legacy Center to discuss how this new law can affect you and your heirs.