The new Setting Every Community Up for Retirement Enhancement (SECURE) Act, effective January 1, 2020, is the broadest piece of retirement legislation passed in thirteen years. The law focuses on retirement planning in three areas: modifying required minimum distribution (RMD) rules for retirement plans; expanding retirement plan access and increasing lifetime income options in retirement plans. This article will focus on the modifications to the RMD rules and its effects on inherited IRAs.
Before the SECURE Act, if you had money in a traditional Individual Retirement Account (IRA) and were retired, you were required to start making withdrawals at age 70½. But for people who have not reached age 70 ½ by the end of 2019, the SECURE Act pushes RMD start date to age 72. By delaying the RMD start date, the SECURE Act gives your IRAs and 401(k)s additional time to grow without required distributions and the resulting income taxes.
Since RMDs will not start until age 72, the new law will give you an additional two years to do what are known as Roth IRA conversions without having to worry about the impact of required distributions. With a Roth IRA, unlike a traditional IRA, withdrawals are income tax-free if you meet certain requirements and there are no RMDs during your lifetime. The general goal of a Roth conversion is to convert taxable money in an IRA into a Roth IRA at lower tax rates today than you expect to pay in the future.
The SECURE Act also removed the so-called “stretch” provisions for beneficiaries of IRAs. In the past, if an IRA was left to a beneficiary, that person could, stretch out the RMDs over his or her life expectancy, essentially “stretching” out the tax benefits of the retirement account. But with the SECURE Act, most IRA beneficiaries will now have to distribute their entire IRA account within ten years of the year of death of the owner. However, there are exceptions to the ten-year rule for the following beneficiaries: Surviving Spouse; Children under the age of majority; Disabled; Chronically ill; and an Individual not more than ten years younger than employee.
The SECURE Act means it is now very important to review the beneficiary designations of your retirement accounts. You want to make sure they align with the new beneficiary rules. Prior to the SECURE Act, a spousal rollover was generally the best practice to preserve the IRA. However, for many with large retirement accounts, it may now be better to begin distributing the IRA earlier in order to minimize exposure to higher tax brackets. It may also be beneficial to name multiple beneficiaries on an IRA to spread the distributions to more taxpayers, so the ten-year rule has less of an impact on the beneficiary’s income tax bracket.
Prior to the SECURE Act, many people used trusts as beneficiaries of retirement accounts with a “see-through” feature that let the beneficiary stretch out the tax benefits of the inherited IRA account. The benefit of the trust was to help manage the inherited IRA account and to provide protection from creditors. However, many of these trusts provided the beneficiary with access to only the RMD. With the new rule that all money must be taken out within ten years, these trusts no longer have the same effect and could be troublesome, requiring that significantly more money be distributed to the beneficiary annually than initially intended. In addition, the trust funds would likely be exhausted after ten years rather than providing funds to the beneficiary over his or her remaining life expectancy.
Anyone with a trust as the beneficiary of an IRA should immediately review the trust language with an experienced Estate Planning attorney to see if it still aligns with his or her intended goals. If you are not sure what the new SECURE Act means for your retirement account, you should also contact an experienced estate planning attorney to review your beneficiary designations.