Either way, the goal of this new legislation is to improve retirement security for many Americans. And that’s a good thing.
The new law is called the SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement. The legislation makes some substantial changes to the rules about retirement accounts, including IRAs and 401(k)s, that will have very direct effects on account owners and beneficiaries.
The upside? The bill is designed to help more workers gain access to workplace retirement accounts. From tax incentives to changes in the regulations for small businesses, the SECURE Act does offer some very real benefits that may help more employees save for retirement.
The downside? There are a number of changes that are creating some concern and a little confusion as account holders try to sort out the best way to adjust their planning.
Here is a quick summary of some of the most notable changes that you should know about:
Age for Required Minimum Distributions is now 72
Americans are working longer and will no longer be required to withdraw assets at age 70 ½.
- If you turned 70 ½ in 2019, you will still be required to withdraw your first RMD by no later than April 1, 2020. Failure to do so will result in a 50% penalty of your RMD.
- If you turn 70 ½ in 2020, you will fall under the new rules and not be required to withdraw until you turn 72.
This change may provide tax benefits, depending on which tax bracket you are in.
You can make IRA contributions beyond age 70 1/2
The SECURE Act also eliminates the maximum age for traditional IRA contributions. Because Americans are living longer and often working well past the traditional retirement age, it made sense to allow people to continue making contributions past the old cap of 70 1/2 years old, as long as they are working.
Inherited IRA distributions must be taken within 10 years
In the past, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your life expectancy.
The new law requires most beneficiaries to receive distributions from an inherited IRA or 401(k) plan within 10 years following the death of the account holder.
This creates a number of issues, including bumping the beneficiaries into higher tax brackets. The accelerated payout, combined with IRA distributions taxed as ordinary income can place a heavy financial burden on beneficiaries. If you have an IRA that you planned to leave to beneficiaries based on prior rules, you may want to reevaluate your retirement and estate planning strategies with one of our attorneys.
There are some exceptions to the 10-year rule and they include
- Surviving spouses
- Minor children
- Disabled and chronically ill beneficiaries
- Beneficiaries who are less than 10 years younger than the deceased participant
Whatever the specifics of the situation, under the 10-year payout rule, all funds must be dispersed to the beneficiary by December 31st in the year of the 10th anniversary of the decedent’s passing.
The reason for eliminating the “stretch IRA” (which is applicable in most situations) is to pay for the lost revenue from the 2017 tax reform law. It is expected that this provision of the SECURE Act will generate $16 billion in revenue over the next ten years.
IRAs Payable to Trusts
Before January 1st, 2020, we would often advise clients who have trusts incorporated in their estate plans to name those trusts as beneficiaries on IRAs and qualified retirement accounts. We made this recommendation most commonly in situations where a client had a trust for beneficiaries—whether due to age, disability, or financial imprudence—and doing so did not affect the stretch IRA option.
The SECURE Act requires the 10-year distribution period for trust beneficiaries, too. This does not mean that your trustee must distribute the IRA to the beneficiaries over ten years; but it does mean that, in most cases, the trustee must pay the income tax on the IRA distributions over ten years. The IRA distributions then accumulate in the trust for the beneficiary, and the trustee uses this money for the beneficiary’s needs.
So far so good, BUT the difference is that trusts are taxed at the highest marginal rate (currently 37%) once the income exceeds $12,950.
So what do you do about this? It depends on your personal situation. We recommend that you schedule an appointment so we can advise you about your options, including the possibility of modifying your trust to ensure that you protect as much as possible for your beneficiaries.
It’s all a lot to take in, but don’t let that stop you from taking action!
The SECURE Act is the most substantial piece of legislation affecting retirement planning in well over a decade. Besides ushering in some sweeping changes, it also creates many nuances depending on the various possible scenarios for beneficiaries and trusts.
The best course of action will depend on your situation, of course, but the one piece of advice that applies to everyone is to start exploring your options sooner than later. Changes in the tax code, family relationships, and your own financial circumstances are common – and they often require that you update your planning strategies every few years.
This may be the year to revisit what you originally planned. Make an appointment with us today.