Many estate plans need to be adjusted after the government made major changes to how retirement plans are accessed, taxed and distributed with the “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act).

This legislation carrying substantial repercussions on optimal tax strategies for retirement and estate plans was signed into law by President Trump on December 20, 2019 as an attachment to a bipartisan appropriations bill. It went into effect less than two holiday-shortened weeks later on January 1, 2020.

Everyone with a retirement account must re-evaluate their beneficiary designations and retirement income strategies in light of the new rules, which affect defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) and 529 plans. It is imperative to discuss these opportunities and challenges with your financial advisor.

The 3 Most Significant Changes and Their Implications

Change: In most cases, requires the entire account in an IRA or defined contribution plan to be distributed within 10 years after the owner passes.
Impact: Increases the tax impact for most non-spouse beneficiaries when inheriting accounts, preventing them from maintaining tax advantages by stretching distributions over their life expectancy.

Change: Raises age for required minimum distributions (RMDs) from 70 ½ to 72.
Impact: Allows people to grow retirement account longer before they are forced to take money out.

Change: Removes contribution age limit for traditional IRAs (if employee is still working).
Impact: Gives people more years to build upon their retirement savings.

Other Notable Changes

Change: Significantly reduces barriers to establishing and maintaining “open” Multiple Employer Plans – essentially pooled 401(k)s between employers.
Impact: Expands access for workers without a workplace savings plan by lowering the costs for retirement plan sponsors so employers without a plan would begin offering one to their employees.

Change: Adds a safe harbor rule for ERISA fiduciaries selecting a “Lifetime Income Provider” – i.e. an annuity company.
Impact: Encourages more financial advisors to include lifetime annuities as investment options.

Change: Allows 529 education plan distributions to repay student loans and pay for apprentice programs.
Impact: More ways to use tax-advantaged funds saved for education expenses.

Change: Allows penalty free withdrawals from qualified plans of up to $5,000 after the birth or adoption of a child.
Impact: Tax relief for growing families.

The Act’s Drastic Impact on Most Estate Plans

Under previous rules, the RMDs of inherited IRAs and 401(k)s could often be stretched out to provide income over the life of the beneficiary. This was a very powerful tax benefit for loved ones that helped minimize the tax impact of inherited accounts by leaving the plan in its tax-deferred status. A 50-year-old son or daughter could stretch payments out over 34 years, while grandchildren and great grandchildren could do this for potentially as long as 80 years.

The SECURE Act eliminates these tax benefits for anyone passing away on or after January 1, 2020 – with some exceptions. Now when the owner of an IRA or DC plan dies, most non-spouse beneficiaries must withdraw that money within the following 10 years. This means that most estate plans will no longer work the way they were expected to work. While designated beneficiaries are still designated beneficiaries, the new way their inheritance is distributed and taxed will create drastically different results than previously anticipated when the estate plan was designed. Even some types of IRA trusts make no sense under the new law.

Exceptions: “Eligible Designated Beneficiaries” who are still eligible for the longer payout period:

The same rules that applied to these groups of people before the SECURE Act will continue to apply after the SECURE Act. They can still “stretch” distributions over the beneficiary’s life expectancy. Spousal beneficiaries may still engage in a spousal rollover as well.

However, the one big change to be aware of is that the new 10-year rule implemented by the SECURE Act will still apply after the death of these eligible designated beneficiaries:

  • Beneficiaries of IRAs whose original owners died before 2020
  • Surviving spouses
  • Chronically ill or disabled beneficiaries
  • Beneficiaries within 10 years of age of the original owner
  • Minor children up to the age of majority, or age 26 if the child is still in school. At that point, the 10-year payout begins.

Evaluating the State of Your Estate Plan

The SECURE Act affects different people in very different ways. There is not one universal fix for all situations to account for the new rules. Some people will be able to salvage their estate plan with a few changes, or no changes; but all estate plans should be reviewed with a financial advisor to figure out what changes are needed, if any.

© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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