The SECURE Act emerged from Congress in 2019 with overwhelming bipartisan support. SECURE is an acronym for Setting Every Community Up for Retirement Enhancement and represents the largest retirement reform for Americans in over a decade.
It also poses major concerns for many retirees.
Having gone into effect on January 1, 2020, the 29 provisions of this new law bring legislative changes to retirement accounts that may cause previously drafted estate plans to be undesirable – if not potentially burdensome – for certain beneficiaries. Below are three key takeaways to be aware of.
Three Key Provisions of the SECURE Act:
1. Delaying the beginning date for minimum distributions from an IRA. – First, there is some potentially good news: the SECURE Act increased the beginning date for required minimum distributions (RMDs) to 72 years old (from 70 ½). Since many people are retiring later in life, this change allows some additional time for IRA accounts to grow before withdrawals must be taken (and taxes are paid).
While this is mostly good news, it does not apply to people who had reached age 70 ½ before the end of 2019 and before the SECURE Act went into effect. To avoid penalty for missing a RMD, please consult an estate planning attorney.
2. Removing the contribution restriction to a traditional IRA. – Previously, people working in their retirement years had to stop contributing to a traditional IRA after reaching age 70 ½. Under the SECURE Act, this restriction is gone, and people may now contribute to a traditional IRA at any age, so long as they are actively working and meet certain requirements. There are still limits to determine contribution limits on an annual basis for individuals and married couples.
3. Removing “stretch” provisions for most beneficiaries of an IRA. –Before the SECURE Act, individuals with an IRA valued at $200k+ may have structured their estate plan to provide tax-advantaged payouts for beneficiary trustees – often, a spouse, child(ren), grandchild(ren) or other heirs.
Previously, the law allowed for a conduit or “pass-through” trust to be named as beneficiary of a retirement account. Trustees/beneficiaries could then take RMDs over the course of their life expectancy, making the RMD each year very small (and therefore, the taxes due as well). This is referred to as a “stretch” payout.
Now, with the SECURE Act, most beneficiaries now only have 10 years to withdraw the entire balance of an inherited retirement account. Obviously, this results in larger distributions and therefore, a larger tax burden. The only beneficiaries who are not subject to the new 10-year payout rule are those who:
- Are under the age of 18;
- Have a chronic illness or disability (as defined in the Internal Revenue Code); or
- Are not more than 10 years younger than the account owner, such as the sibling of an individual who has no spouse or children.
The Conduit Crisis: SECURE Act Implications for a Conduit Trust
As mentioned above, the SECURE Act poses a major challenge for those who have a conduit or “pass-through” trust in their estate plan. Rather than protecting the majority of someone’s wealth through small RMDs to their beneficiary(s) over time, the entire balance of an inherited retirement account must be liquidated within 10 years of the account owner’s death, causing an accelerated income tax burden.
Now, the dilemma faced by many is “How do I protect this retirement account for my heirs without creating a significant tax burden?”
The answer? Review and amend your documents (if needed) with an estate planning attorney as soon as possible. By doing this, you and your attorney can determine what might happen to your retirement account. If a conduit provision was used, you may want to consider amending or updating your existing estate plan. There are many alternate estate planning tools that may make sense, such as an Irrevocable Life Insurance Trust (ILIT) or, a Charitable Remainder Trust, to name a couple. For some, a ROTH conversion of an existing IRA may make sense. It depends on each person’s goals and unique circumstances.
Review Your Estate Plan with an Attorney Regularly – The enactment of the SECURE Act is just one example of why reviewing your estate plan on a regular basis with an estate planning attorney is important. When it comes to your life’s savings and creating a plan for your loved ones, it isn’t always a “once and done” scenario.
Other important reasons to review your estate plan include:
- Making any changes to a child’s inheritance;
- Moving to a new state;
- Life events in your family, such as a birth, death, marriage, divorce or illness;
- Appointing new guardians or trustees; and
- Adding or removing beneficiaries.
An attorney who focuses their practice on estate planning can help identify the strategies and tools to best help you accomplish your goals.
At Kimbrell Estate Planning, we know how important it is to make sure your goals are met in a way that you are both comfortable with and that you understand. Contact us to schedule your complimentary consultation to either review your existing estate plan or discuss creating one.