The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the biggest retirement planning law in decades. However, when all is said and done, the new law may have just as significant an impact on estate planning, especially if younger individuals are in line to inherit IRAs or qualified retirement plan accounts.
Key SECURE Act provisions
The SECURE Act includes noteworthy provisions for both individuals and businesses. Let’s focus here on a summary of the key tax law changes for individual retirement-savers.
Delayed RMDs. Generally, you must begin taking distributions from qualified retirement plans and IRAs after a certain age. Before the SECURE Act, these “required minimum distributions” (RMDs), which are based on your account balance and life expectancy, had to start at age 70½, although technically the first distribution has to be made no later than the April 1st after you reached age 70½. For those who reach 70½ prior to 2020 (that is, anyone born before July 1, 1949) the rules don’t change. If you were born July 1, 1949 or later, however, the SECURE Act extends the age requirement to age 72, giving you even more time to build up your tax-deferred nest egg. Thus, you may defer the first distribution to as late as April 1 after you reach age 72.
As a result of the coronavirus (COVID-19) pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) shortly after the SECURE Act became law. (See “The CARES Act waives RMD rules through year end” for additional details about delayed RMDs.)
IRA contributions. Previously, you couldn’t contribute to an IRA after age 70½, but the SECURE Act removes this age restriction. This enables you to supplement existing retirement plan accounts with IRA contributions if you continue working or otherwise qualify. For 2020, the annual contribution limit is the lesser of earned income or $6,000 ($7,000 if you’re age 50 or older).
Annuity options. To encourage the use of annuities in retirement planning, the new law requires 401(k) plan administrators to provide annual “lifetime income disclosure” statements reflecting annuity options. In addition, it provides more flexibility to participants who acquire annuities, including portability between plans (such as when an employee leaves a job and begins participating in a new employer’s 401(k) plan).
Stretch IRAs. The SECURE Act cracks down on stretch IRAs that allowed nonspouse beneficiaries to spread out RMDs over their life expectancies. If set up properly, a stretch IRA could span multiple generations. Furthermore, this technique could also be used with qualified retirement plans as well as IRAs.
Under the SECURE Act, funds from inherited accounts must generally be distributed to nonspouse beneficiaries within 10 years of the account owner’s death. This provides a finite end to stretch IRAs and reduces their effectiveness as an estate planning tool.
Be aware, however, that the qualified beneficiaries who inherited accounts before 2020 can still benefit from a stretch IRA. Also, the new law includes exceptions that will allow certain nonspouse beneficiaries to take distributions over their life expectancy.
Strategies after the SECURE Act
Because of the SECURE Act’s impact on estate planning, review your estate plan and corresponding documents, such as beneficiary designation forms. In light of the changes, you may be inclined to make certain revisions, especially in regards to stretch IRAs.
It may make sense to convert a traditional IRA into a Roth IRA. Generally, RMDs from inherited Roth IRAs will be 100% tax-free. This provides a distinct advantage over traditional IRAs. Balance the current tax liability for a conversion against the benefit of future tax-free payouts.
Alternatively, you might establish a charitable remainder trust (CRT). With this approach, the charity designated as the beneficiary receives the trust remainder on your death, while designated income beneficiaries, such as your children, receive annual distributions from the CRT.
Similarly, you might arrange qualified charitable distributions (QCDs) to go directly from an IRA to a charity. If you’re age 70½ or older, the first $100,000 of such distributions is tax-free, although they won’t count as deductible charitable contributions. (Be aware that any QCD amount also counts as an RMD.) Further, the $100,000 limit is per IRA owner, so if both you and your spouse have IRAs, and you’re so inclined, you could both transfer $100,000 per year.
Now is the time for an estate plan review
Provisions of the SECURE Act will likely affect your retirement and estate plans. Your estate planning advisor can help you review your plans to ensure that they continue to meet your objectives.
SIDEBAR: The CARES Act waives RMD rules through year end
To help mitigate the financial crises related to the coronavirus (COVID-19), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) waives the required minimum distribution (RMD) rules for certain defined contribution plans and IRAs for calendar year 2020. This will help individuals avoid a financially imprudent sale of retirement assets during the stock market downturn.
The waiver covers both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.