Be Aware: The new SECURE Act May Substantially Impact Your Retirement and Estate Plans
If you have an IRA or 401(k) account as part of your retirement and estate planning, you should be aware of important new legislation that has changed a number of long-standing rules concerning contributions, required minimum distributions, and estate planning for the inheritance of such accounts upon your death. Some of these changes include:
- No Age Cap on IRA Contributions:
Beginning on January 1, 2020, the maximum age for making IRA contributions has been eliminated. Under the prior law, a person could no longer contribute to a traditional IRA after age 70.5, even if that person was still working and trying to save for retirement.
- Age For Required Minimum Distributions Increased to 72:
Prior to the SECURE Act, a person was required to begin taking certain minimum distributions from their IRA and 401(k) beginning when they reached age 70.5. Under the new law, required minimum distributions for people who turn 70.5 after December 31, 2019 will not be required until they reach age 72.
- Major Changes to Inheritance Rules for IRAs and 401(k) accounts:
Beginning on January 1, 2020, most non-spouses who inherit an IRA or 401(k) will be required to withdraw and pay taxes on ALL assets from the inherited IRA or 401(k) within 10 years of inheriting those assets. While this new provision does not change the rules for anyone who has already inherited an IRA or 401(k) (either directly or through a trust) before the end of 2019, it may significantly impact both the estate plans of those who wish to designate a non-spouse beneficiary of their IRA or 401(k), as well as the planning of most non-spouses who will inherit an IRA or 401(k).
This new law essentially eliminates so-called “stretch” IRAs where a person who inherited an IRA either directly or through a trust could, in some cases, stretch out their required minimum distributions over the span of their life and, as a result, take these distributions at the most tax-advantaged time for their particular situation. For most people, this tax planning strategy will no longer be possible as all of the assets will need to be distributed and taxed at the recipient’s regular income tax rate at the time they take the distribution. For a non-spouse beneficiary inheriting such an account in their 30s or 40s, this change means that such a person could be required to withdraw and pay taxes on all assets in that inherited account during their 40s and 50s when, statistically, most people are at the height of their earning potential and thus fall into a higher income tax bracket. To avoid this result, some people may choose to withdraw some or all of their retirement funds after they retire and pay the required tax at a lower rate than their beneficiaries would have to pay later on.
If you currently have an IRA or 401(k) account, it is essential that you consider the impact of this new law when planning for your retirement and when developing your estate plans.
If you would like assistance with updating your estate plan to address the impact of this new law, we would be happy to lend a hand.