Know How the SECURE Act May Impact You and Your Beneficiaries
On December 20, 2019, the President signed into law the SECURE Act (Setting Every Community Up for Retirement Act). The new law represents the largest change to IRAs and qualified retirement plans in the last decade. If you have an IRA or tax qualified retirement plan (401(k), 403(b), 457 plan, etc.), this new law probably affects you and/or your beneficiaries. Most changes became effective January 1, 2020.
Required Minimum Distributions
The date at which you must begin taking distributions has been changed.
You no longer must begin taking distributions by April 1st of the year following the year in which you reach age 70.5. Instead, you must begin taking distributions by April 1st of the year following the year in which you reach age 72. However, if you turned 70.5 in 2019, the “old” rules still apply and you must begin your distributions. Also remember, these are the minimum distribution requirements. You can take distributions earlier and you can take more than the required minimum amount. Lastly, you can still elect to have qualified charitable distributions (QCDs) made directly from your IRA, up to $100,000, once you are age 70.5. The required age for QCDs did not change to age 72. However, upon reaching age 72, QCDs will offset the required distribution amount.
The “stretch IRA” is no longer available for most IRA beneficiaries.
For IRA owners who die on or after January 1, 2020, most non-spouse beneficiaries are no longer permitted to spread distributions from the IRA over the beneficiaries’ life expectancies. Instead, most beneficiaries will be required to take the entire IRA balance within ten years of the IRA owner’s death. There is no annual distribution requirement; however, the entire balance must be withdrawn by December 31st of the tenth year. This accelerated distribution period may cause the IRA beneficiaries to lose more of the IRA funds to federal and state income tax. The loss may be especially acute when a trust has been designated as a beneficiary. For example, it is common for a trust that has been designated as a beneficiary of an IRA to require that only the annual required minimum distribution be distributed to the trust. In such a case, under the new law, the only required distribution would be the entire IRA balance in the tenth year after the IRA owner’s death. This may cause the IRA to lose up to half of its value due to income taxes; clearly, not the intent of the IRA owner. There are some exceptions to the ten-year withdrawal rule for spouses, minor children of the IRA owner, disabled beneficiaries, and beneficiaries who are less than ten years younger than the IRA owner.
IRA owners over age 70.5 can now make contributions.
You can now make IRA contributions at any age as long as you have earned income from wages or self-employment. Note, however, the amount of any QCD will be reduced by the cumulative total of post-70.5 IRA contributions that have not already been used to offset an earlier QCD.
On account of the new law, we highly recommend that you do the following:
- Review all beneficiary designations, especially those involving trusts, to ensure that your intentions can be carried out.
- Review your estate planning documents with your attorney for any necessary changes.
- Contact Legacy to learn more about the SECURE Act and to explore possible planning opportunities for you.
Visit our website at www.lptrust.com or call 920.967.5020.