On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020, makes sweeping changes to the laws governing retirement plans.
Here are a few major provisions of the SECURE Act:
- Increased the age for required minimum distributions (RMDs) from retirement accounts from 70 ½ to 72 years of age.
- Eliminated the age limit for contributions to IRAs
- Expanded the allowable uses of 529 accounts
- Increased annuity options in retirement plans
- Added a new exemption allowing penalty-free withdrawals of up to $5,000 from retirement accounts for the birth or adoption of a child
- Eliminated the “stretch” IRA for most non-spouse beneficiaries
Individuals’ estate plans will be most impacted by this last point because most non-spouse designed beneficiaries will no longer be able to “stretch” RMDs of inherited retirement accounts over their life expectancy. The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not yet reached the “age of majority,” disabled individuals, and chronically ill individuals may still benefit from the pre-SECURE Act withdrawal rules to stretch the RMDs over their life expectancy.
Individuals who have conduit trusts in their estate planning documents may want to reconsider this strategy. If a beneficiary is not exempt under the new law, conduit trust provisions will likely result in the distribution of the entire balance of an inherited retirement account within ten years of the account owner’s death. Trusts with “accumulation” provisions may be a more appropriate strategy to ensure that retirement account funds have protection from a beneficiary’s creditors, future lawsuits, or divorcing spouse. A Roth conversion is another strategy that may help with offsetting any adverse consequences caused by the accelerated tax payment on inherited retirement accounts and to protect assets for a beneficiary.
Estate plans should be regularly reviewed. Individuals should promptly meet with their estate planning attorney to review their will or trust in light of the SECURE Act.