SECURE Act Delivers Sweeping Retirement Reform
1.29.20 | Client Alert
The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act has radically changed estate planning for retirement plan benefits. Here is a summary of the key provisions of the Act, which took effect on January 1, 2020, that may impact retirement account owners and beneficiaries.
Increase the Required Minimum Distributions (RMD) Age – More Time to Grow Your Wealth
The Act increased the age when retirement plan RMDs must begin from 70½ to 72. Those planning their estates will be able to factor into their planning this additional time to grow their retirement savings.
10-Year Rule – Shorter Window for Beneficiaries to Take RMDs
Until now, when an IRA owner dies, non-spousal heirs of any age, regardless of the type of IRA, must take RMDs based on their life expectancy. The younger the beneficiary, the lower the RMD, which allows more funds to remain in the IRA to stretch the IRA over time — perhaps over decades. The ability to stretch the retirement plan distributions allows undistributed amounts inside the retirement accounts to continue to grow on a tax-deferred basis until distributed. This Stretch IRA strategy is greatly diminished under the Act as retirement accounts must distribute the entire IRA within 10 years of the owner’s death. The distributions can take place at any time, but must be completed by the end of the 10th year following the account owner’s death. This presents planning opportunities for the beneficiary to maximize the after tax distributions from the IRA.
There are exceptions to the new 10-year rule where the beneficiary is:
- the surviving spouse;
- disabled or chronically ill;
- not more than 10 years younger than the deceased IRA owner; or
- a child who hasn’t reached majority age.
For non-designated beneficiaries, payouts depend on the account owner’s death. This applies to charities, estates, or a non-qualified trust beneficiary. If the account owner dies before their RMDs begin, the non-designated beneficiary will be subject to the familiar 5-year payout rule. In cases where the account owner dies after RMDs begin; the payout will be made based on the account owner’s remaining life expectancy.
Important: In light of these significant changes, review beneficiary designation forms — especially if a trust is used— to make sure they still meet the account owners’ goals and objectives.
Age 70½ Restriction on Traditional IRA Contributions Eliminated
Recognizing our longer lifespans and extended working periods, the Act allows taxpayers to contribute to traditional IRAs as long as they receive compensation.
Additional Noteworthy Provisions and Planning Opportunities
- Designating a Trust as an IRA Beneficiary: This approach should be reviewed in light of the Act’s 10-year distribution rule.
- Consider Charitable Contributions Including a Charitable Remainder Trust: To the extent a taxpayer is charitably inclined, it now makes even more sense to designate charities as beneficiaries of your retirement plans. As a variation, consider having a Charitable Remainder Trust (CRT) as a beneficiary of your retirement plan. CRTs are exempt from income tax and could receive lump sum IRA benefits without any initial income tax consequences.
- Converting to a Roth IRA: The economic benefits of converting from a traditional IRA to a Roth IRA should be revisited in light of the new 10-year payout rules. While a Roth conversion triggers income tax upfront, there are no mandatory distribution requirements during the owner’s lifetime, and any distributions are free of income tax. After the owner dies, beneficiaries would be subject to the new 10-year payout rules, but the distributions would continue to be income tax free. Deciding whether to do a Roth conversion under the new rules should be carefully analyzed on a case-by-case basis.
- Withdrawals from Retirement Plans for Births or Adoptions: In these circumstances, the Act waives the 10% penalty on distributions from qualified plans and IRAs before age 59½.
- Transfers From IRAs to Charities: If you meet certain requirements, beginning at age 70 ½ you can still transfer up to $100,000 directly from a traditional IRA to a qualified charity without the funds being included in income. This is known as a Qualified Charitable Distribution.
- Including Annuities in 401(k)s: The Act now protects 401(k) sponsor companies from the credit risk associated with including annuities in 401(k)s if certain conditions are met. Moreover, the annuities are now portable if and when the participant departs from the company.
- Long-term Part-timers and 401(k)s: The Act requires employers to allow employees with 500 service hours in three consecutive years to participate in 401(k)s. This change is effective for plan years beginning after December 31, 2020.
The SECURE Act makes many changes that will significantly affect planning for retirement plan benefits. The impact on individual account owners and beneficiaries will depend on their unique circumstances.
Questions: Contact Scott T. Ditman at 212.331.7464 | SDitman@BerdonLLP.com or your Berdon advisor.
Berdon LLP New York Accountants