Important Retirement Account Changes Under the SECURE Act

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In a spending bill passed in December 2019, Congress enacted the SECURE Act, changing several laws governing retirement plans, some of which increase your ability to save for retirement while others require an immediate review of your estate plan.

  • Age-based restrictions on IRA contributions have been eliminated. As long as you still have “earned income”, you can continue to make contributions to your traditional IRA and potentially save for retirement for several years longer than under the previous law.
  • Congress increased the age when you must begin taking distributions from your retirement accounts.  Your new required beginning date for retirement account distributions is April 1 of the year following the year you turn 72 years old.  Keep in mind, if you turned 70 ½ in 2019, you are still subject to the previous law, requiring you to begin taking distributions as of April 1, 2020.
  • Graduate students may count taxable stipends and non-tuition fellowship payments as “earned income”.  Although the graduate student may not have enough discretionary income to make IRA contributions that year, this change in the law provides a planning opportunity for parents or grandparents who would like to make a contribution to an IRA on behalf of a child or grandchild. 

Congress has also made drastic changes to the law governing distributions from retirement accounts inherited from anyone who dies after January 1, 2020.  The new default rule is that a designated beneficiary has 10 years following the year of the death of the account owner to withdrawal the full balance of the inherited retirement account. 

There are exceptions to the 10 year default rule for individuals who qualify as “Eligible Designated Beneficiaries”.  Eligible Designated Beneficiaries are permitted to use their actuarial life expectancy to withdraw the balance of the inherited retirement account. The five types of Eligible Designated Beneficiaries are:

  • Spouses. 
  • Minor Children. However, once the child reaches the age of “majority”, he or she has ten years to withdraw the remainder of the account balance. 
  • Disabled Individuals.
  • Chronically Ill Individuals. 
  • Anyone less than 10 years younger than the decedent.

If you named a trust as a beneficiary of your retirement plans, now is the time to review your estate plan.  If the beneficiaries of the trust are not all Eligible Designated Beneficiaries, there will only be a 10-year distribution window, which could potentially have adverse income tax consequences for a trust or faster distributions from the trust than you anticipated.

Planning options include the purchase of life insurance using distributions from your retirement accounts during your lifetime.  Proper planning in connection with using a trust to purchase the policy can result in a payout that is free from both income tax and estate tax.  You could also consider a Roth conversion of your retirement accounts.  This would require payment of income taxes now, but all future distributions from the trust for both you and your beneficiaries would be income tax free.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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