SECURE Act Signed into Law
On December 20, 2019, Congress passed—and the President signed into law—the SECURE Act. This landmark legislation may affect how you plan for retirement, particularly with regard to distributions you receive from retirement plans and IRAs during life and distributions to your beneficiaries after your death. These provisions of the Act became effective on January 1, 2020. Several key provisions of the Act are discussed below to assist you in understanding the effect of the Act on retirement and estate plans.
Repeal of the maximum age for traditional IRA contributions
Before 2020, individuals could only make traditional IRA contributions until age 70½. Now, the new law allows an individual of any age to make contributions to a traditional IRA as long as the individual received earned compensation, which generally means earned income from wages or self-employment.
Required minimum distribution age raised from 70½ to 72
Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The 70½ age requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.
For individuals who attain age 70½ after December 31, 2019, the age at which they must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.
Partial elimination of stretch IRAs
Beneficiaries of plan participants or IRA owners dying before 2020 (both spousal and non-spousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).
However, under the Act most non-spouse beneficiaries of plan participants or IRA owners will now be required to take distributions within a 10-year period following the plan participant’s or IRA owner’s death (later for some participants in collectively bargained plans and governmental plans). So, for those non-spouse beneficiaries, the “stretching” strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill or disabled individual; and (4) any other individual who is not more than 10 years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
The SECURE Act provisions, especially those that apply to post-death distributions to beneficiaries or trusts established for beneficiaries, may have a substantial impact on your estate plan. Beneficiary designations, and especially provisions of a trust designated as a beneficiary of the plan or IRA, should be reviewed with these changes in mind.
Learn more about the SECURE Act here.
If you would like to engage our firm to discuss these matters and learn how the SECURE Act may impact your estate plan, please give us a call to schedule an appointment with one of our attorneys listed below.
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