President Trump has signed a spending bill that makes major changes to retirement plans. The new law is designed to provide more incentives to save for retirement, but it may require workers to rethink some of their planning.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act changes the law surrounding retirement plans in several ways:
- Stretch IRAS. The biggest change eliminates “stretch” IRAs in many situations. Under prior law, if you named anyone other than a spouse as the beneficiary of your IRA, the beneficiary could choose to take distributions over his or her lifetime and to pass what was left at the beneficiary’s death onto future generations (called the “stretch” option). Under prior law, the required minimum distributions were calculated based on the beneficiary’s life expectancy. This allowed the money to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his or her own beneficiaries. Effective for IRA’s of decedents dying on or after January 1, 2020, the SECURE Act requires most beneficiaries of an IRA to withdraw all the money in the IRA within 10 years of the IRA holder’s death, with limited exceptions. 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 will apply to those who inherit IRAs starting on January 1, 2020.
- Required minimum distributions. Under prior law, you must begin taking distributions from your IRAs beginning when you reach age 70 ½. Under the new law, individuals who were not 70 ½ at the end of 2019 may now wait until age 72 to begin taking distributions.
- Contributions. The new law allows workers to continue to contribute to an IRA after age 70 ½, which is the same as rules for 401(k)s and Roth IRAs.
- Employers. 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.
- Annuities. 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.
- Withdrawals. 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. For IRA’s of decedent’s dying before January 1, 2020, there is a 10 percent penalty for early withdrawals in most circumstances.
Given these changes, individuals with significant retirement assets need to immediately reevaluate their estate plans. Some people have used stretch IRAs as an estate planning tool to pass assets to their children and grandchildren. One way of doing this has been to name a trust as the IRA’s beneficiary, and these trusts may have to be reformed to address the new rules. If a stretch IRA is part of your estate plan, consult with your attorney to determine if you need to make changes.
It’s also important to note that the SECURE Act changes have no impact on an IRA which you may have inherited from a decedent who died prior to January 1, 2020, though your ability to pass that inherited IRA on to the next generation would be impacted.