Three Ways the SECURE Act May Impact Your Retirement Plan
The "SECURE" Act was signed into law on December 20, 2019, with most provisions taking effect January 1, 2020. The SECURE legislation, which stands for "Setting Every Community Up for Retirement Enhancement," modified many statutory requirements pertaining to retirement benefits. While the new law aims to help Americans set aside more money for their retirement, it also greatly limits distribution options as is described below. Three key elements of the SECURE Act, and how they may impact your retirement plan, are highlighted below.
1. Required Minimum Distributions now start at age 72. Before the passing of the SECURE Act, the law mandated retirement plan participants and IRA owners to withdraw a required minimum distribution ("RMD") amount from those accounts beginning at the age of 70½. Now, under the SECURE legislation, individuals who reached 70½ years of age after December 31, 2019, can delay taking distributions until reaching the age of 72. Pushing back the RMD start date gives individuals additional time to allow their 401(k)s and IRAs to grow, which can result in a substantial increase in retirement savings.
2. No age restrictions on traditional IRA contributions. The SECURE Act eliminated the maximum age for making traditional IRA contributions. Previously, once an individual attained the age of 70½, he or she was prohibited from contributing to a traditional IRA. Under the new law, an individual can continue to allocate earnings money to a traditional IRA at any age.
3. Elimination of the "Stretch" IRA. Under prior law, a "designated beneficiary" of an inherited IRA or 401(k) could generally "stretch" distributions over his or her life expectancy. This option is now only available to a limited class of eligible designated beneficiaries defined in the SECURE Act, including a surviving spouse, a minor child of the deceased IRA owner, a chronically ill or disabled beneficiary, or a beneficiary who is less than 10 years younger than the original IRA owner. For all other individual designated beneficiaries, under the SECURE Act, all funds in an inherited IRA must be distributed to the individual beneficiary within 10 years of the original IRA owner's death. There are no required minimum distributions within those 10 years, but by the end of the 10th year following the owner's death, the entire balance of the IRA must be distributed. As under the old rules, all non-individual designated beneficiaries, such as charitable organizations or estates, must withdraw all IRA amounts within 5 years of the IRA owner's death.
The new rules will have a significant impact on trusts named as the beneficiary of retirement plan assets. One type of trust commonly used as a beneficiary of IRA assets is a conduit trust. Prior to the SECURE Act, the trust could use the beneficiary's life expectancy for purposes of determining required distributions only if required distributions from an IRA to the trust were required to be promptly passed through to the trust beneficiary. However under the new law, if a beneficiary of a conduit trust is not an eligible designated beneficiary (surviving spouse, etc.) and thus not eligible for distributions over his or her life expectancy, the previously required conduit trust language will, at a minimum, require the pass through of all distributions to the trust beneficiary in the year the distributions are received by the trust. This outright pass through of IRA distributions will be a concern for many retirement plan holders who intended these trusts to spread out distributions to beneficiaries over many years. Under the SECURE Act, an accumulation trust, which is another type of trust commonly used as a beneficiary of IRA assets, may well work better for non-spouse beneficiaries. An accumulation trust is designed to receive distributions from an IRA, but may accumulate the distributions for the benefit of the beneficiary. For a non-spouse beneficiary, the accumulation trust will be more flexible than a conduit trust given that the 10-year rule now applies to both conduit and accumulation trusts.
Due to the rule changes enacted by the SECURE Act, this a good time to review your estate plan and beneficiary designations to see how the law change impacts you. If you are interesting in learning more, Quarles & Brady's Employee Benefits Group recently conducted a webinar on the SECURE Act and other developments. For any questions regarding the new law or if you would like to review your plan, please call your Quarles & Brady estate planner or: