Florida Elder Law & Estate Planning Blog

SECURE Act Makes Big Changes To Retirement Plans

The SECURE Act has just been signed into law and went into effect January 1, 2020. Short for Setting Every Community Up for Retirement Enhancement, the legislation makes sweeping changes to the rules for retirement plan savings.

We are in the process of analyzing the law, consulting opinions from the estate planning and financial planning communities, and awaiting promulgation of detailed regulations. Once we have gathered all the facts, we will advise clients impacted by the law about what modifications, if any, should be made to their estate plans. We will post this information on our website as soon as possible so check back here soon.

Below is basic information about the SECURE Act and its potential impact on our clients.

Changes To Mandatory Contributions & Withdrawals

The mandatory age at which distributions from IRAs and 401ks must begin increases from 70 ½ to 72.  However, if you turned 70 ½ before December 31, 2019, the old rules still apply, and you will have to take your first distribution by April 2020.

There are no longer any restrictions on the age at which you may contribute to your traditional IRA. You may now make contributions beyond age 70 ½, as long as you have earned income.

Provisions of the legislation will make it easier for employer-sponsored 401K plans to offer annuities as an option.

An early withdrawal of up to $5,000 may be taken from a qualified retirement account, without the prior 10% penalty, when a child is born or adopted.

Non-Spouse Beneficiary May Not Stretch Out IRA Inheritance

The new law eliminates the ability of a non-spouse IRA beneficiary to take withdrawals based on his/her own life expectancy. For anyone who dies on or after Jan. 1, 2020, the non-spouse beneficiary of the decedent’s IRA must withdraw all funds from the account within 10 years of the owner’s death.

Withdrawals need not be made according to any particular schedule, but all funds must be withdrawn 10 years. This will produce particularly harsh income tax consequences for younger beneficiaries who must withdraw inherited funds during their peak earning years. In effect, eliminating the IRA stretchout is the federal government’s way of recouping tax revenue lost as a result of raising the age for required minimum distributions.

There are some exemptions to the 10-year rule: beneficiaries who are chronically ill or disabled, and minors. A child who has not yet completed a “specified course of education” may be considered a minor until age 26, although the law fails to define “specified course of education.”

Spouse beneficiaries may continue to use their own life expectancy for required minimum distributions.

Who Is Impacted?

The elimination of the IRA stretchout will impact you if:

You anticipated that your non-spouse beneficiary would stretch out his/her IRA inheritance, or

You created an IRA Stretch Out Trust to receive your IRA funds, which limits the non-spouse beneficiary’s withdrawals to those based on the beneficiary’s own life expectancy.

Possible Methods That May Be Used To Mitigate Loss of IRA Stretch Out

As stated above, the specific steps that clients should take will depend on their current estate plan, and specific goals and circumstances. Preliminary analysis suggests such steps may include:

Leave your IRA to your spouse, who may be able to take payouts over a longer period than 10 years. Your spouse can then leave the IRA to non-spouse beneficiaries (usually your children), who would then have an additional 10 years to complete withdrawals.

Leave the IRA segment of your estate to non-spouse beneficiaries who are in lower income tax brackets, thus reducing the impact of income taxes on withdrawals. Other assets may be left, on a stepped-up basis, to non-spouse beneficiaries in higher income brackets.

Name multiple non-spouse beneficiaries for your IRA, allowing the tax burden to be shared by beneficiaries over the course of 10 years.

If you do not need all of your IRA money, you can withdraw more than the required minimum distribution and use the funds to purchase a life insurance policy. The insurance funds will go into a trust that can stretch out the payments to your non-spouse beneficiaries. You will pay taxes on the withdrawal now, but possibly at a lower rate than the non-spouse beneficiaries would pay. The insurance proceeds will be income tax-free to the non-spouse beneficiaries.

Convert your traditional IRA to a Roth IRA, in one fell swoop or in phases. Your non-spouse beneficiaries who inherit the Roth IRA will not be taxed on their withdrawals. The downside, of course, is that there are no controls on when they make withdrawals or how much they withdraw.

You can read the text of the SECURE Act here: https://www.congress.gov/bill/116th-congress/house-bill/1994/text