THE SECURE ACT:
HOW CHANGES IN IRA REGULATIONS WILL IMPACT YOUR ESTATE PLAN
The SECURE Act was signed into law on December 20, 2019 changing how retirement benefits are paid out at the owner’s death. For decades the concept of the “stretch IRA” allowed owners to name an individual or see-through trust as beneficiary, which at the owner’s death allowed the beneficiary to withdraw benefits over his or her (or the oldest trust beneficiary’s) life expectancy.
The “stretch IRA” is no longer an option for most people. It has been replaced with a ten year payout for most designated beneficiaries. This means that the retirement benefits must pay out by the end of the year of the tenth year anniversary of the owner’s death (“ten year payout rule”). The new rule does not require “minimum distributions”. Distributions can be taken in a lump sum or spread out over this period of time.
The exceptions to the rule are the following five eligible designated beneficiaries:
The surviving spouse of the owner. A surviving spouse can withdraw funds over his or her life expectancy. However, at that spouse’s death, the ten year payout rule applies.
Minor child. If the beneficiary is the child of the owner of a retirement account or IRA and that child is a minor, distributions are based on that child’s life expectancy. However, once that child reaches majority the ten year payout rule applies.
Disabled beneficiary. If the beneficiary is disabled, payout can be over his or her life expectancy and can be payable to a supplemental needs trust for the sole benefit of the disabled beneficiary. However, at that beneficiary’s death, the 10 year payout rule applies.
Chronically ill individual. If the beneficiary meets the definition of chronically ill, payout is based on life expectancy. At the beneficiary’s death, the 10 year pay out rule applies.
Beneficiary who is less than 10 years younger. The Life expectancy payout applies if the beneficiary is not more than 10 years younger than the owner. Upon the beneficiary’s death, the 10 year pay out rule applies.
The rule for a non-designated beneficiary such as an estate, a charity or trust that is not a see-through trust remains the same. Under the rule in place prior to the SECURE Act, if the owner died before the required begin date of required minimum distributions, the entire account must pay out by the end of the year of the fifth anniversary of the owner’s death and if the owner died on or after the required begin date, the non-designated beneficiary had to withdraw the entire account balance over what remained of the owner’s life expectancy. It is unclear under the Act whether the longer life expectancy payout still applies and the IRS will need to issue guidance.
The new rules impact traditional retirement plans and IRAs more than Roth IRAs. For Roth IRAs the acceleration of the payout does not increase taxes because the distributions are tax free. It does impact the ability to have a longer period of tax-free growth.
Other changes include increasing the age when required minimum distributions need to be taken from 70 ½ to 72. Regardless of age, beginning in 2020 any worker can contribute to an IRA. Previously, you could not contribute in or after the year the individual reached 70 ½.
If you own a retirement account or IRA and are concerned about the 10 year payout and how it affects your existing estate plan, have named a trust as a beneficiary of a retirement account or IRA, or are concerned about your beneficiary receiving distribution within the 10 year payout, we encourage you to contact us to review your current estate plan as it may no longer accomplish what you intended.
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