When the SECURE Act passed in 2019, the biggest impact on estate planning was the elimination of the “lifetime stretch” for most beneficiaries of individual retirement plans (IRAs). Before the SECURE Act, a beneficiary of an IRA had the option to take distributions over their own life expectancy. This allowed families to pass down tax deferred accounts and accumulate wealth tax free across generations. Now, the only beneficiaries eligible for the stretch are spouses, disabled or chronically ill individuals, minor children of the plan owner, and those not less than ten years younger than the plan owner. For non-eligible beneficiaries, the 10-year rule applies. This rule requires that the beneficiary withdraw the entire inherited retirement account within 10 years.
The new SECURE Act 2.0, passed on January 1, 2023, brought new rules and clarifications. The original SECURE Act was silent on whether the 10-year payout rule required distributions on an annual basis. SECURE Act 2.0 clarifies that the beneficiary must take out at least the required minimum distribution each year, with a full payout by the tenth year. Luckily, anyone who inherited an IRA before the clarification will not be penalized for failure to take out the required minimum distribution.
SECURE Act 2.0 has brought relief for stranded 529 Plans. Unused 529 funds can now be rolled over into a Roth IRA without a penalty. Beginning in 2024, the beneficiary of a 529 Plan can roll funds (capped at $35,000.00) into a Roth IRA. It used to be that a 10% penalty was imposed, and the withdrawals taxed if not used for qualified educational expenses. To qualify, the 529 account must have been open for at least 15 years. Keep in mind that there is a limit to the annual contribution amount, which is currently set at $6,500 for 2023. So it would take five years to move the maximum amount allowed into the Roth.
The new SECURE Act also fixed the issue of leaving a retirement account to a Supplemental Needs Trust. The Supplemental Needs Trust was not being afforded the lifetime stretch if the remainder beneficiary was a charity. SECURE Act 2.0 allows for a charitable remainder beneficiary without the loss of the stretch for the primary disabled beneficiary.
Another boon is that the age that a person must start taking their required minimum distribution has increased to 73 from 72. The penalty for not taking timely distributions has also decreased. For those 64 or younger, SECURE 2.0 increases the minimum age to 75 starting in 2033. This allows individuals to keep money in their retirement accounts longer, allowing it to grow without incurring taxes on withdrawals.
The SECURE Act and SECURE Act 2.0 have made major reform to longstanding retirement planning. It is advisable to speak with your estate planning attorney to discuss if these changes warrant updates to your estate plan.