The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”), significantly changed the rules regarding distributions from traditional Individual Retirement Accounts (“IRAs”) both during an account owner’s life and after his or her death. Some of the key aspects of the SECURE Act that may affect you, your estate and your planning are summarized below.
Impact During Your Life
The SECURE Act increased the age which a person must begin taking traditional IRA distributions, known as required minimum distributions (“RMDs”) from age 70 ½ to age 72, thereby allowing the account owner to defer mandatory (taxable) distributions for another year or two. While COVID-related tax relief suspended this RMD for all taxpayers in 2020, the SECURE Act permanently increased the beginning age for these distributions to 72. It also removed the age cap so that individuals may continue to make IRA contributions after reaching the age for taking RMDs. IRA account owners can still begin making charitable contributions directly from their IRA accounts at age 70 ½ even though distributions are not required until age 72.
Impact After Death
The most significant changes to the law apply to required distributions from IRAs (both traditional and Roth) on the death of original account owners in 2020 and after. The prior law permitted most beneficiaries of inherited IRAs to take their required distributions over their remaining life expectancy, allowing them to spread income over a longer period (commonly referred to as the “stretch IRA”). Although these rules were complex, particularly with respect to trusts, many took advantage of these provisions to postpone the payment of income tax and often reduce the marginal tax rate on distributions in order to achieve a greater net return to the beneficiary/heir.
The SECURE Act limited the life expectancy payout only to a surviving spouse, minor children, disabled beneficiaries and individual beneficiaries less than 10 years younger than the account owner. For most other IRA beneficiaries, the life expectancy payout option was replaced with a simpler rule that shortens the payout period. Under the new rule, most other IRA beneficiaries no longer have annual distribution requirements, but must withdraw the entire IRA (and accumulations) within 10 years of the original owner’s date of death. The revised 10-year payout rule begins applying to minor beneficiaries upon reaching age 18. The rules remained the same where an IRA does not designate a beneficiary (or where the account owner’s estate is the beneficiary) on the date of death. In that case, the IRA must be distributed within 5 years of the account owner’s death if the owner died before turning age 72 or if after, distributed over the account owner’s remaining life expectancy.
Impact on Your Estate Plan
Account owners leaving significant IRA assets should consider how these rules affect their plans. A previously created IRA Trust may no longer be suitable. IRAs that name children as direct beneficiaries to allow for the tax deferral may be better paid to a trust that could provide protection from creditors or a divorcing spouse or, alternatively, to the account owner’s spouse or other beneficiary that qualifies for the life expectancy payout.
In most cases, we recommend that you re-visit your beneficiary designations with a trusted advisor to ensure you understand how SECURE impacts your planning. Strobl Sharp PLLC is a team of experienced and trusted lawyers that can advise on all legal matters relating to estate planning. For more information, visit Strobl Sharp online at www.stroblandsharp.com or on LinkedIn.