Just last month the President signed into law the brand new Setting Every Community Up for Retirement Enhancement Act of 2019 as part of the year end Further Consolidated Appropriations Act. Why should you care? Because the SECURE Act makes major changes to retirement accounts.
Tax qualified retirement accounts like IRAs, 401(k) plans, profit sharing plans, etc. allow individuals and employers to invest savings on a tax deferred basis. Because taxes are not due until funds are withdrawn from an IRA, 401(k) or other tax qualified retirement account, these vehicles can provide much higher net returns than similar investments that don’t provide for tax deferral. As a result, the longer funds can stay in an IRA, 401(k) or other tax qualified retirement account, the greater the potential returns.
Prior to the SECURE Act, individuals had to take required minimum distributions (RMD) starting at age 70.5. The SECURE Act defers RMDs to age 72. A year and a half extra deferral may not sound like much but it can result in significantly higher returns in a large IRA, 401(k) or other tax qualified retirement account.
However, like the “Good Lord” when the government giveth, it often taketh away at the same time. Thus, the downside of the SECURE Act is that it eliminates the former option for certain children and other beneficiaries to inherit an IRA, 401(k) or other tax qualified retirement account and take RMDs over the child’s or other beneficiary’s life expectancy. While surviving spouses and certain disabled children can continue to elect lifetime RMDs (often called “stretch out”), stretch out is no longer an option for most non-spousal beneficiaries who inherit IRA, 401(k) or other tax qualified retirement account. Instead, most non-spousal beneficiaries will have to completely distribute an inherited IRA, 401(k) or other tax qualified retirement account within ten years of the deceased owners death. Thus the SECURE Act dramatically reduces tax deferral opportunities when inheriting IRA, 401(k) or other tax qualified retirement account.
So is the SECURE Act a positive or negative development? Like so many things, it depends which side you are on. SECURE Act clearly is favorable to people who fund there own IRA, 401(k) or other tax qualified retirement account since the SECURE Act gives them an extra year and a half of tax deferral. In changing from a half year to full year RMD trigger (i.e. age 72 rather than 70,5) the SECURE Act also may make it a bit simpler to figure out your first year RMD. On the other hand the SECURE Act will require most non-spousal beneficiaries to pay income tax on inherited IRA, 401(k) or other tax qualified retirement account sooner than prior law would have required. The result will be less chance to defer tax and inherited accounts possibly triggering higher tax brackets.
How does the SECURE Act impact your trust and estate planning? Make no mistake; the SECURE Act will have major impacts, but the effects will vary depending on your estate planning goals and circumstances. For instance, the SECURE Act may require changes to trusts named as beneficiaries of IRA, 401(k) or other tax qualified retirement account if you don’t want the account to be distributed to your children within ten years of your passing. Changes also may be appropriate when an IRA, 401(k) or other tax qualified retirement account is intended to benefit a person with serious disabilities such as via a supplemental needs trust.
What should you do? At FriedmanLaw, we recommend that you come in for a consultation with lawyers Larry and Mark Friedman to fine tune your planning to account for the new environment triggered by the SECURE Act. Happy planning!