Q. I heard that there is a new law which makes major changes to IRA’s and other retirement plans. Can you comment?
A. The new law, signed by President Trump on December 20, 2019, and effective January 1, 2020, is called the “SETTING EVERY COMMUNITY UP for RETIREMENT ENHANCEMENT ACT”, or the “SECURE ACT” for short. It was designed to promote more saving for retirement, but it may require seniors to rethink some of their estate planning. Following are the major changes:
- Stretch IRA’s Limited. The biggest change eliminates “stretch” IRA’s for many beneficiaries. Under former law, your Designated Beneficiary (“DB”) could choose to take distributions over his or her lifetime and to pass what was left, after the DB’s death, onto future generations (called the “stretch” option). The required minimum distributions were then withdrawn each year based upon the beneficiary’s life expectancy. This allowed the IRA to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his or her own beneficiaries, potentially “stretching” the payout over two or more generations. Unless the beneficiary is a member of one of five (5) favored categories (see below), the SECURE Act requires beneficiaries who inherit retirement accounts to withdraw all the money within 10 years of the original owner’s death. In many cases, these withdrawals will now occur during the beneficiary’s highest tax years, meaning that the elimination of the “stretch” option is effectively a tax increase for many beneficiaries. This provision will apply to those who inherit retirement plans on or after January 1, 2020.
- Stretch IRA’s Still Available For Certain Beneficiaries: The “stretch option” is still permitted for the following beneficiaries: (1) the surviving spouse of the account owner; (2) Children of the owner, but only until they reach age 18; (3) Disabled persons; (4) Chronically Ill persons, and (5) Beneficiaries not more than 10 years younger than the account owner.
- Required minimum distributions. Under prior law, the owner was required to begin taking distributions from his IRA beginning when he reached age 70½. Under the new law, individuals can now wait until age 72 to begin taking distributions.
- No Age Cap on Contributions. The new law allows workers to continue to contribute to an IRA after age 70 ½, eliminating the former age cap.
- Annuities. The new law 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 could be included in a plan.
- Withdrawals. The new law allows an early withdrawal of up to $5,000 from a retirement account without penalty in the event of the birth of a child or an adoption. Formerly, there was a 10 percent penalty for early withdrawals in most circumstances.
Given these changes, retirement plan owners (including IRA’s, 401K’s, etc. ) should review their estate plans, especially if they relied upon “stretch” options as an estate planning tool. One way some did this was to name a trust as the beneficiary of their IRA. Those trusts should now be reviewed to determine if they need to be reformed to conform to the new law. If an IRA “stretch option” is part of your estate plan, you may wish to consult with your attorney or tax advisor to determine if you need to make changes.
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Gene L. Osofsky wishes to thank Harry Margolis, Esq. of MA for permission to use and modify his original article on topic.