Question: I recently heard that the Secure Act passed and that it may affect how my retirement accounts. What changes should I expect and do I need to adjust my estate plan?

Answer: Yes, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was passed last minute and will be effective January 1, 2020.

The SECURE Act makes several changes to retirement accounts, both in how we can save and how they will be spent, but the biggest change practioners are concerned about is that the SECURE Act eliminates, for some beneficiaries, the ability to stretch an Individual Retirement Account (“IRA”) over the inheritor’s life expectancy. Current law allows beneficiaries of IRAs to create an inherited IRA account and take minimum required distributions over their life expectancy. This allows the beneficiary to continue to enjoy tax-deferred growth in the account yielding large increases in value over time if the beneficiary only takes minimum required distributions.

However, with few exceptions to be discussed below, now inheritors of IRAs will have to liquidate the account over a period of ten (10) years. For larger IRAs will few or one beneficiary, this will mean a great loss of tax deferred growth. For example, under the old rules, if a 30-year-old beneficiary inherited a $1,000,000 IRA, she would only have to take $18,762 the first year, with the distribution increasing about $2,000 per year for the first 10 years. However, under the SECURE Act, the same beneficiary will have to take the IRA out over 10 years, or about $142,378 per year.

For smaller IRAs, or IRAs with many beneficiaries, the effects of the SECURE Act will not cause substantial concern. However, if your estate plan includes a large IRA for few beneficiaries, the impact on how much they will be forced to withdraw is significant.

Now more than ever, you may consider having the IRA pay to a trust for your beneficiary. While the trust will still be required to take distributions over ten (10) years, the trustee will have discretion on whether or not to distribute the funds to the beneficiary or to accumulate the withdrawals within the trust. For beneficiaries with creditor problems, having a trust will provide protection against the large withdrawals which must be taken in a small amount of time.

Another technique to protect against the beneficiary having to take large withdrawals over ten (10) years is to consider converting your IRAs to Roth IRAs, that is, a retirement account which grows tax deferred but on which the tax has already been paid and does not mandate required minimum distributions. Depending on the IRA owner’s tax bracket, you should discuss the Roth conversion with your tax advisor and financial planner. Many people are able to convert small portions of their IRA over time to a Roth, lessening the income tax consequence to the IRA owner.

There are some exceptions to the ten (10) year withdrawal rule. If your IRA beneficiary is the surviving spouse, the IRA owner’s minor child, a disabled or chronically ill person, or a person not less than ten years younger than the IRA owner, the requirement to liquidate over ten years does not apply. However, for the minor children exception, once they reach the age of majority, the ten (10) rule is reinstated.

In addition to the changes to how we leave retirement accounts to our beneficiaries, the IRA owners will also see some changes. Namely, required minimum distributions will now not have to be taken until the participant reaches the age of 72 (up from 70 ½), IRA owners can contribute to their IRA so long as they are working (eliminates age limit for contributions, formerly at 70 ½), a safe harbor for employer liability protection was added opening the door to more annuity products as possible investment choices and there will now be exception to the 10% penalty rule for distributions taken from the IRA by the owner prior to reaching age 59, if said distributions are used in relation to a birth or adoption (however, these distributions are subject to a $5,000 lifetime maximum, and are income taxable).

Whether or not the SECURE Act will affect your estate plan will depend on the individual’s assets and planning goals. Talk to your estate planning attorney to see if there are any updates you should be making.