As part of a major spending package, President Trump has signed the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), legislation that makes major changes to IRAs and other retirement plans. The SECURE Act offers more incentives for individuals and small business owners to save for retirement, but may require an urgent rethinking of your estate plan to avoid costly, unintended consequences for your beneficiaries.
The SECURE Act changes the law surrounding retirement plans in several ways:
· Stretch IRAS.
- The biggest change eliminates “stretch” IRAs, for the most part. Before, if you named someone other than your spouse as the beneficiary of your IRA, the beneficiary could potentially take distributions over their lifetime (spreading out the tax liability) and pass what’s left onto future generations (the “stretch” option). The required minimum distributions were calculated based on the beneficiary’s life expectancy, allowing the money to grow tax-deferred over potentially a long period of time. Now, the SECURE Act requires non-spouse IRA beneficiaries (with a few exceptions) to withdraw all of the money in the account within 10 years of the IRA holder’s death or, in some cases, the life expectancy of the deceased plan participant. In many cases, these withdrawals will take place during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision applies to those who inherit IRAs starting on January 1, 2020.
· Required minimum distributions.
- Under prior law, you had to start taking distributions from your IRAs beginning at age 70 ½. Under the new law, individuals who are not 70 ½ at the end of 2019 can now wait until age 72 to begin taking distributions.
- The new law allows workers to continue contributing to an IRA after age 70 ½, which is the same as rules for 401(k)s and Roth IRAs.
- The tax credit businesses get for starting a retirement plan is increased and the new law makes it easier for small businesses to join multiple-employer plans.
- The newly enacted legislation removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.
- The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances.
If IRAs or other retirement accounts are part of your estate plan, the SECURE Act could significantly affect your family’s financial legacy. Call us at (518) 869-6227 or send an email to LF@lavelleandfinn.com to schedule a meeting to talk about the most appropriate options for your circumstances.