SECURE Act of 2019

The SECURE Act (officially titled the Setting Every Community Up for Retirement Enhancement Act of 2019) was signed into law on December 20, 2019. The SECURE Act is intended to increase access to tax-advantaged retirement accounts and ease compliance burdens for plan sponsors. However, this Act severely limits the ability to “stretch” the income tax deferral benefit of inherited retirement accounts. This post provides a brief summary of some of the provisions of the Act that may be of most interest to readers and encourages everyone to review their estate plan documents and beneficiary designations, particularly if their estate plan includes a trust which may receive retirement plan benefits.

Partial Elimination of the IRA Stretch

Under prior law, IRA’s and other qualified plans that were left to a non-spouse beneficiary, such as a child or grandchild, could be withdrawn annually over the course of that beneficiary’s life expectancy, resulting in favorable income tax deferral. The SECURE Act removes that benefit by requiring that most retirement assets inherited in 2020 and beyond be distributed within a 10-year period after the account owner’s death, effectively accelerating the withdrawal of funds in inherited accounts. This 10-year distribution period does not apply to “eligible designated beneficiaries,” defined as (i) the surviving spouse, (ii) a minor child of the plan participant (though the 10-year period kicks in when the minor child reaches the age of majority), (iii) a disabled beneficiary, (iv) a chronically ill beneficiary, or (v) a beneficiary who is less than ten years younger than the plan participant.

The new 10-year required distribution period applicable to most beneficiaries who are not a surviving spouse is a major change in the law and may require you to revise your estate plan and beneficiary designations. The limited stretch for your beneficiaries may create an income tax burden much sooner than anticipated. Also, if retirement plans pass through your estate plan into a trust for your beneficiaries, those trusts should be reviewed to determine if the trusts will qualify for the 10-year distribution period and, if so, whether the trustee has flexibility to withdraw and distribute funds over the course of the 10-year distribution period to avoid having to withdraw all funds in a single year. There also may be planning opportunities available to offset the loss of the income tax deferral, including the use of charitable trusts or life insurance.

Although the loss of the “stretch” feature is a negative change for many clients (or their beneficiaries), the SECURE Act includes several provisions most clients will view as positive changes.

Increased Age for Required Minimum Distributions

Under prior law, retirement account owners were required to begin taking “required minimum distributions” (“RMDs”) at age 70 ½. For those account owners who reach age 70 ½ after December 31, 2019 (i.e. you turn 70 after June 30, 2019), that beginning date is extended to age 72. By delaying the start of RMDs, you can allow time for additional asset growth, as well as an additional deferral of income recognition.

No Age Limitation on IRA Contributions

Under prior law, an individual over the age of 70 ½ could not contribute to an IRA. The SECURE Act has eliminated this restriction and repealed the age cap for traditional IRA contributions. However, a person still must have earned income to make IRA contributions.

Penalty-Free Withdrawals for the Birth of a Child or an Adoption

Under the SECURE Act, an owner of an IRA or other retirement account may withdraw up to $5,000 following a qualified birth or adoption of a child without paying the 10% early-withdrawal penalty tax. The distribution must occur within one year of the child being born or the adoption being finalized.

Action Needed

Because the SECURE Act eliminated the partial “stretch” of distributions for most beneficiaries of IRAs and retirement accounts, we encourage a review of your beneficiary designations and existing estate plan documents. Particularly if your current estate planning documents include trusts that (depending on beneficiary designations) may receive retirement plan assets, please consider having us review those estate planning documents to determine whether the trust language should be revised to reflect the SECURE Act’s major changes regarding retirement plan distributions.

Please feel free to contact Stuart & Branigin if you have questions or if you would like to arrange a meeting with one of our attorneys to discuss estate planning.

Stuart & Branigin was founded in 1878 in Lafayette, Indiana. Our experienced and knowledgeable lawyers provide trusted counsel to local, regional and national clients. Our firm is composed of five practice groups, Corporate and Non-Profit, Litigation, Personal Injury, Private Client Services, and Transportation.