While the financial and political news at the end of 2019 focused on the fiscal year 2020 federal appropriations bill and another potential government shut down, legislation related to retirement plans was attached to that spending bill just a handful of days before it was passed on December 19, 2019. The Setting Every Community up for Retirement Enhancement Act of 2019, referred to as the SECURE Act, as separate legislation, had passed the House overwhelmingly in May of 2019 but was in limbo in the Senate until it was attached to the spending bill in December. This appropriations bill was ultimately signed into law by President Trump on December 20, 2019.
The SECURE Act includes significant changes to the way IRAs and qualified plans will be administered, effective January 1, 2020. These changes apply not only to how a plan is administered while the participant is living, but also provides for a major overhaul of the way those retirement assets may be distributed to the plan beneficiaries at the participant’s death.
Changes in plan administration during the life of the participant
Prior to January 1, 2020, the IRS required most taxpayers to begin taking required minimum distributions from qualified plans and traditional IRAs by April 1st of the year following the one in which they turn 70 ½. With the trend toward people working longer, the SECURE Act increased that age to 72 for those that were not yet required to take their minimum distribution under the old law (meaning those that had not turned 70 ½ prior to December 31, 2019).
The SECURE Act also changes another age related restriction by no longer prohibiting Traditional IRA contributions once a taxpayer reaches age 70 ½. Thus, beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA if they have earned income, bringing IRAs in line with all other retirement plans that already allowed contributions to be made as long as a person was still working.
Changes in plan distributions upon the death of the participant
While the SECURE Act does not change the method of designating a beneficiary to receive inherited assets, the ability to delay or “stretch” out those payments to the beneficiary is significantly impacted.
Under the prior law, a “designated” beneficiary could receive distributions over his or her lifetime through what was referred to as a “stretch IRA.” A “designated” beneficiary was any individual named by the owner as a beneficiary, including trusts that met certain conditions. This lifetime stretch out of payments resulted in several benefits to the beneficiary, including prolonged income tax free growth and the reduction in the cumulative income tax on the distributions, as the required distributions would typically be spread out over many more years using a life expectancy table versus the five-year distribution for all other beneficiaries. Other beneficiaries (not qualifying as “designated”) had to receive all of the inherited IRA benefits over a five-year period after the death of the participant unless the participant had already begun taking their required minimum distribution. In that case, the beneficiary could continue to take IRA distributions over the participant’s remaining life expectancy versus the five year required payout.
The SECURE Act eliminated the ability to stretch an IRA payout over the life expectancy of a “designated” beneficiary. Instead, with a few exceptions, the payment period from an inherited IRA or plan may not exceed 10 years from the death of the participant. This is true even when the participant had already begun taking their required minimum distributions.
Beneficiaries exempt from the new rules are known as “eligible designated” beneficiaries, and include the surviving spouse, a minor child of the owner (until child reaches ages of majority), the disabled, the chronically ill, or an individual who is not more than 10 years younger than the owner. For these “eligible designated” beneficiaries, as well as non-designated beneficiaries, the law has not changed.
With more and more people holding significant portions of their wealth in qualified plans and IRAs, the SECURE Act provisions related to how beneficiaries may elect to receive retirement plan distributions upon the death of the participant creates a need for an immediate review of all current estate plans, especially where trusts were created to specifically handle large retirement assets.
While this letter serves as a summary of the key provisions of the SECURE Act, please contact your tax advisor and your South State Wealth Advisor for a full review of how this new legislation will impact your current retirement planning and estate planning.