On January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect, and it could have big implications for both your retirement and estate planning strategies—and not all of them are positive.
While the law includes taxpayer-friendly measures to help you save for retirement, it also contains provisions that could have disastrous effects on planning strategies you may be using to protect and pass on assets held in your retirement accounts. Given this, if you hold assets in a retirement account, you need to review your financial plan and estate plan right away.
Here are three of the SECURE Act’s biggest changes and how they could affect your retirement account both during your lifetime and after your death.
1. Increased age for Required Minimum Distributions (RMD)
Prior law required you to start making withdrawals from your retirement account at age 70 ½, but the SECURE Act pushes back the RMD start date until age 72.
2. Repeal of the maximum age for IRA contributions
Under prior law, those who continued working could not contribute to a traditional IRA once they reached 70 ½. Under the SECURE Act, you can continue making contributions to your IRA for as long as you’re still working.
3. Elimination of stretch provisions for inherited retirement accounts
Under prior law, following your death, beneficiaries of your retirement account could choose to stretch out distributions—and the income taxes owed on those distributions—over their own life expectancy. This not only offered your heirs major tax savings, it also encouraged them to not withdraw and spend the inherited assets all at once.
Under the SECURE Act, however, most designated beneficiaries will now be required to withdraw all assets from the inherited account—and pay income taxes on them—within 10 years after your death. The law offers exemptions to the 10-year withdrawal rule, but only for certain beneficiaries: surviving spouses, minor children up to the age of majority, the disabled, the chronically ill, and individuals not more than 10 years younger than the IRA owner.
Apart from these exceptions, opportunities for stretching an IRA over an extended period of time are no longer available. So, if you want the people who inherit your retirement account to benefit from long-term income tax deferral—and asset protection from lawsuits, creditors, or divorce—you must meet with us now to rework your plan.
Impact on trusts: You may have already addressed the distribution of your retirement account’s assets using a “conduit” provision in your will or trust. Prior to the SECURE Act, a trustee of a trust that included a conduit provision would distribute only the required minimum distributions (RMD) to trust beneficiaries each year. This allowed the beneficiary to take advantage of the “stretch” based on their life expectancy and protected the account balance, exposing only the small RMD amounts to creditors and divorce.
Under the SECURE Act, the 10-year limit for distributions will lead to the acceleration of income tax due, possibly bumping your beneficiaries into a higher tax bracket. This hefty tax burden would likely result in your beneficiary receiving significantly less funds from the retirement account than you planned on.
Moreover, because all funds in your retirement account must be withdrawn within 10 years of your death, a conduit trust would be required to distribute all of its assets outright to the beneficiary within this shortened period, eliminating any long-term asset protection.
Alternative options: Given these new rules, you may want to consider amending your trust from a “conduit trust” to an “accumulation trust.” This trust structure can’t extend the tax benefits any longer than 10 years, but it can protect the assets from your beneficiary’s future risky activities and/or a divorce. That said, this option would come with a significant income tax liability for your heirs, so your plan should include additional strategies to address this.
Update your estate plan now
As your Personal Family Lawyer®, we can update your plan to address all of the ramifications the SECURE Act might have on the distribution of your retirement account’s assets to your loved ones following your death. Schedule a Family Wealth Planning Session today to get started.