In late December, Congress passed legislation in conjunction with a massive appropriations bill that significantly changes how retirement accounts, including IRAs, will be handled in the future. President Donald Trump signed the legislation on Dec. 20, 2019, making it effective.
Michael A. Dolan
The provisions affecting your retirement are contained in the portion of the legislation known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act. While there was very little discussion about this legislation in the mainstream media at the end of the year, this act was discussed in the public eye earlier in 2019; because it was rare legislation that had significant bipartisan support.
So how does the SECURE Act impact planning around your retirement assets? First, the act is a significant tax increase. This should not come as a surprise, because most legislation has that effect.
Here are the highlights of the changes the SECURE Act made that may affect you.
It increases the age at which you must begin taking withdrawals from a retirement account. Previously, you were required to begin taking withdrawals in the year in which you turn age 70½. Under the act, you do not have to begin taking distributions until the year in which you turn 72. Be aware that if you turned 70½ prior to the end of 2019, you must continue to take your required minimum distributions even though you are not yet 72.
The act allows you to continue to make contributions to your retirement account regardless of your age. This is a nice benefit, because many Americans are working later into their lives, and now they can continue to contribute to their retirement accounts if they have earned income.
Big change in inherited IRAs
The most significant change under the act involves how your retirement accounts are handled after your death. Except for a surviving spouse (and a few “eligible designated beneficiaries,” which include very special circumstances) your retirement plan beneficiaries will no longer be able to “stretch out” the inherited IRA over their own life expectancy.
For most beneficiaries, other than the surviving spouse, the law now limits continued income tax deferral after your death to a 10-year period. The beneficiary must withdraw the entire retirement account balance and take it into his or her taxable income within 10 years of the date of your death. There is some flexibility around the 10 years. The beneficiary may take some or all of it at any time, as long as it is all withdrawn by the deadline.
Previously, beneficiaries could stretch out the income tax deferral over their life expectancy, which could have been 20 or 30 years. Those individuals who put estate planning in place to take advantage of the prior law should immediately review their existing strategies with their estate planning attorney.
If your goal is to have those unused retirement assets pay out over the balance of the life of the beneficiary, there are some planning options that will still allow you to increase the amount your family would receive over the new 10-year payout requirements.
The appropriateness of the strategies is dependent on the size of your retirement accounts, the age of the desired beneficiaries, and your overall goals and objectives for the balance of your estate. A key issue to recognize is that even though the stretching out of retirement accounts has effectively ended, there may still be planning opportunities that allow you to accomplish similar objectives.
Be aware! Many advisers, articles, and blog posts are communicating a lot of advice around what you should or shouldn’t do as a result of this change in the law. I strongly encourage you not to blindly follow these recommendations, as much of the advice being offered could cause catastrophic results if you have done some planning around your estate and your retirement plans. Seek professional legal counsel before making changes to retirement beneficiaries, particularly if you have quality trust planning in place.
For most, it is time to update your estate plan, and to learn about and implement — if appropriate — new or different strategies related to maximizing the benefit of your tax-deferred retirement assets.
Dolan, an attorney, helps farm and ranch families achieve comprehensive estate, succession and legacy planning objectives. He is the principal of Dolan & Associates P.C. in Brighton and Westminster, Colo. Learn more at estateplansthatwork.com.