With the dawn of a new decade came, somewhat unexpectedly, the rollout of new federal legislation known as the “SECURE” (“Setting Every Community Up for Retirement Enhancement”) law, enacted on December 20, 2019 and effective on January 1st. SECURE makes significant changes to the minimum distribution rules applicable to tax-favored retirement plans, including IRAs. The new rules are relevant to a great many people and have the overall effect of accelerating the collection of income taxes and upending many assumptions upon which estate plans often rely. For these reasons, this may be an appropriate time for clients with retirement accounts to check in on their estate plans to determine whether adjustments are advisable.
Until this year, retirement assets left to one’s beneficiaries could be paid out gradually, based upon a designated beneficiary’s life expectancy. This “stretching” of the payout period could last for decades and was a benefit to taxpayers succeeding to retirement accounts, allowing deferral of income taxes and the leverage afforded by using pre-tax dollars to compound wealth over time. SECURE changes this radically, truncating the payout period to ten years for most non-spouse beneficiaries. The new ten-year rule does not apply to surviving spouses, nor to a few other types of beneficiaries, including (i) minor children of a retirement plan participant,
(ii) disabled and chronologically ill beneficiaries, and (iii) beneficiaries less than ten years younger than the plan participant or IRA owner. As to these designated beneficiaries, the old, more taxpayer-favorable rules apply. As for retirement plan or IRA owners who died before 2020, the new ten-year limitation will not apply until the first designated beneficiary passes, thus providing some limited grandfathering.
SECURE does not change the former definitions of certain terms of art, including who qualifies as a “designated beneficiary” entitled to more than five years of tax deferral. The new law also does not change which trusts (known as “see through trusts”) qualify as designated beneficiaries. The significant change wrought by SECURE is the accelerated rate at which many designated beneficiaries must draw down retirement plans and pay the tax on the withdrawals. Of particular concern is the impact of the new rules on see-through trusts. A full-throated discussion of this issue is beyond the scope of this memorandum, but for the many clients who have named trusts as retirement plan beneficiaries, a careful review of the impact of SECURE is likely appropriate. If this is of interest to you, please be in touch.
The impact on taxpayers is not all unfavorable. For people born after June 30, 1949, the age for starting required minimum distributions has increased from 70 ½ to 72. In addition, SECURE eliminates the age cap for contributing to a traditional IRA.