President Trump signed into law on December 20, 2019 the Setting Every Community Up for Retirement Enhancement Act (the Secure Act). Not only does the new law influence retirement planning but will affect estate plans too.
The Secure Act changes the age an individual must take a required minimum distribution (RMD) from 70 ½ to 72 years. By pushing back the RMD start date, the Secure Act gives more time for IRAs and 401(k)s to grow without being depleted by distributions and taxes. The RMD age change only applies if an individual has not hit the age of 70 ½ by the end of 2019.
The most significant change, however, is the decrease in the number of years an inherited IRA can be distributed to a beneficiary when the account holder dies. The Secure Act requires most non-spouse IRA and retirement plan beneficiaries to deplete these accounts within 10 years from the account holder’s death rather than over the beneficiary’s estimated life expectancy.
Before the Secure Act, if an IRA was left to a beneficiary, the beneficiary could stretch out the RMDs over his or her own life expectancy as an inherited IRA. Effective January 1, 2020, only surviving spouses, minor children and those not more than 10 years younger than the deceased (and others specifically described in the Act) are generally exempt from this new Secure Act 10-year distribution rule. Any person who falls out of the exemption will likely have tax ramifications whether those are on current or future income tax-planning. As an example, the former Stretch IRA strategy was particularly advantageous for inherited Roth IRAs, because the income those accounts produce can grow and be withdrawn federal income tax-free. The Secure Act now limits such growth on federal tax-free income.
Those individuals who have set up a conduit trust or an accumulation trust as the beneficiary of what was intended to be a Stretch IRA will likely no longer gain the benefit sought after and should immediately review their estate plan. Regardless, all individuals having IRAs or 401ks should review their general estate plan, including current wills, trusts, and retirement account beneficiary designations. The Secure Act’s implications are particular to each family’s situation and may be worth a look to gain an understanding of them.