Planning After Passage of the Secure Act

For the first time in several decades, Congress has enacted substantial changes to retirement plans.  The "Setting Every Community Up for Retirement Enhancement" or "SECURE" Act was signed by President Trump on December 20 and was effective January 1, 2020

The Act makes significant changes to qualified retirement accounts such as IRAs and 401ks. This new law will affect contributions as well as distributions.  Perhaps most importantly, it will affect how beneficiaries may take distributions from inherited retirement accounts.  It will be important to review and update beneficiary designations.  Here are the key changes of the SECURE Act:

  • Increased Age for Contributions to IRA. The SECURE Act repeals the prior rule prohibiting contributions to a traditional IRA after age 70½.  Effective January 1, persons may contribute to an IRA at any age (assuming the person meets the income requirement).
  • Increased Age for Taking RMDs. The SECURE Act increases the beginning date for required minimum distributions (RMD) from a retirement account to age 72 from age 70½.  This will apply to persons who reach age 70½ after December 31, 2019.  Previously, an individual’s first RMD had to be made by April 1st of the year after reaching age 70½.  Effective January 1, an individual’s first RMD must be made by April 1st of the year after reaching age 72. 
  • Elimination of the “Stretch” for Inherited IRAs. To pay for the increased benefits above, the SECURE Act generally eliminates the “stretch” IRA for a beneficiary who is not the spouse or does not meet other requirements. Before enactment of the SECURE Act, a beneficiary who inherited a retirement account could “stretch” the RMDs from the inherited retirement account over the beneficiary’s lifetime.  This provided significant income tax benefits because it allowed the account to continue growing on a tax-deferred basis.  Going forward, most non-spousal designated beneficiaries must withdraw the entire inherited retirement account within 10 years. This 10-year distribution requirement does not apply to a designated beneficiary who is fewer than 10 years younger than the retirement account owner, who is a minor child, or is disabled or chronically ill. The 10-year distribution requirement will apply to grandchildren and to most trusts. Thus, it is important to review beneficiary designations in light of this elimination of the “stretch” IRA and the new requirement for a 10-year distribution.  

There are more provisions to the SECURE Act. Given the significance of this legislation, it will be important to review financial and estate plans with regard to retirement accounts in the new year.  

If you have any questions or would like to discuss the information provided in this Client Alert in more detail, please do not hesitate to contact us.