Setting Every Community Up for Retirement Enhancement Act - The SECURE Act
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act (the “Act”) was signed into law. The Act became effective on January 1, 2020, and it significantly affects the administration of retirement accounts, such as 401k, IRAs, Roth IRAs, defined contribution and defined benefit pension plans, and 529 college savings accounts, of individuals whose deaths occur on or after January 1, 2020.
Importantly, the Act does not modify the ability of a surviving spouse to complete a spousal rollover of the deceased spouse’s retirement account into his or her own retirement account. The Act does, however, make substantial changes to the administration of retirement accounts for non-spouse beneficiaries.
Prior to the Act, a non-spouse beneficiary (including a trust) who received an interest in a decedent’s retirement account was permitted to transfer the retirement account to an “Inherited IRA” (sometimes called a “stretch IRA”) in order to take (i.e. “stretch”) required distributions over the non-spouse beneficiary’s own lifetime, which was typically much greater than the decedent’s life expectancy. Because the growth in value of assets in an Inherited IRA remained tax-deferred until withdrawn, if the beneficiary was much younger than the decedent, the beneficiary could benefit from the tax-deferred nature of the assets and only be required to take small mandatory distributions each year for the remainder of the beneficiary’s lifetime.
The Act eliminates the ability of a non-spouse beneficiary (except minors, individuals who are disabled or chronically ill, or beneficiaries who are not more than ten (10) years younger than the account owner) to stretch distributions from an Inherited IRA over the beneficiary’s lifetime. Instead, a non-spouse beneficiary must now distribute the entire Inherited IRA within 10 years (and in some cases, 5 years) of the decedent’s death. Distributions from the Inherited IRA do not need to be made in any particular installments (e.g., 1/10th per year for 10 years); the entire amount must simply be distributed by the tenth (10th) anniversary of the death of the retirement account owner. The new ten-year rule also applies to Roth IRAs and Roth 401ks even though distributions from Roth accounts are not taxed to the beneficiary.
The Act makes several other modifications to retirement accounts, effective for tax years beginning January 1, 2020:
- Increase in Age for Required Minimum Distributions. The age requirement to begin minimum distributions from retirement accounts is increased from age 70½ to age 72.
- Maximum Age for IRA Contributions. The maximum age for traditional IRA contributions is repealed. You can now continue to contribute to retirement accounts after age 70½, as long as you are still receiving compensation for work.
- Expansion of Employer-Sponsored Retirement Plans. Employers may now automatically enroll employees, increase contributions to up to 15% (up from 10% max), and permit eligible long-term part-time employees to participate in the plan. Small business owners also now have the opportunity to participate in a multiple employer plan (MEP), where unrelated employers join together to offer retirement plan savings opportunities to their small business employees.
- Expansion of Section 529 Education Savings Plans. Tax-free distributions of up to $10,000 from Section 529 plans can now be applied for qualified student loan repayment (for the 529 plan beneficiary or a sibling of the 529 plan beneficiary). In addition, Section 529 plan funds can be used for costs associated with certain apprenticeship programs.
- Qualified Charitable Deduction Exclusion. The qualified charitable distribution exclusion of $100,000 is reduced by the aggregate amount of deductions allowed for traditional IRA contributions made after age 70½.
- Child Birth or Adoption Withdrawals. A new exception to the 10% early withdrawal tax is created for qualified distributions up to $5,000 from retirement accounts to cover costs for a birth or adoption.
What Should You Do?
Retirement accounts continue to represent a significant portion of our clients’ assets which may be transferred to succeeding generations. We encourage you to contact your DeWitt advisor to review your estate plan in light of the changes under the SECURE Act, especially if your current plan uses a trust to pass retirement account assets to succeeding generations. If you are a small business owner, contact your DeWitt advisor to provide guidance on the impact of the SECURE Act and planning opportunities available to your business.