The newly-enacted “Setting Every Community Up for Retirement Enhancement” (SECURE) Act is bringing major changes to retirement plans! This new law makes it easier for workers to save for retirement and provides incentives for employers to help them save. But there is a major downside! The SECURE Act removes some of the tax benefits of inherited IRAs by requiring many beneficiaries of inherited IRAs to withdraw the entire fund within ten years. Workers who have contributed to an IRA may need to revisit their Estate Plans to determine how their beneficiaries will be impacted by the changes to the law. Read this article on what your Will does NOT accomplish.
The SECURE Act changes the law surrounding retirement plans in several ways:
The biggest impact the SECURE Act will have on Estate Planning is the elimination of so-called “stretch IRAs” for many beneficiaries. Before the SECURE Act, workers were able to name anyone as their beneficiary of their IRA, and following the death of the account holder, that beneficiary would be able to take distributions over his or her lifetime. The Required Minimum Distributions (RMDs) were calculated based on the beneficiary’s life expectancy. By stretching the RMDs over the beneficiary’s lifetime, money in the IRA continued to grow tax-deferred. Upon the beneficiary’s death, any remaining funds could then be passed down to that beneficiary’s own beneficiaries, who, in turn, could stretch the IRA over his or her own lifetime. Depending on the size of the inherited IRA, this could result in substantial tax savings. The SECURE Act eliminates this planning tool by requiring most non-spouse beneficiaries of an IRA to withdraw all the money in the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals take place during the beneficiary’s highest tax years, meaning a tax increase for many Americans. The elimination of the stretch IRA will apply to non-spouse beneficiaries who inherit IRAs on or after January 1, 2020.
Fortunately, the SECURE Act does not change the rules for IRAs inherited from a spouse. If a worker leaves his or her IRA to a spouse, that spouse will still be able to take distributions stretched out over the course of his or her lifetime, just as before. Read more about beneficiary designations here.
Required minimum distributions
Before, workers were required to begin taking distributions from his or her IRA when they reach age 70 ½. Under the new law, workers who had not reached age 70 ½ by the end of 2019 can now opt to wait until age 72 to begin taking distributions.
The SECURE Act allows workers to continue to contribute to an IRA after age 70 ½, just like they can continue to contribute to 401(k)s and Roth IRAs.
Businesses that start a retirement plan will receive an increased tax credit for doing so. The new law makes it easier for small businesses to join multiple-employer plans.
Most early withdrawals from an IRA incur a 10% penalty. The SECURE Act carves out an exception to this penalty to make it easier for workers to start a family. Now, new parents will be permitted to withdraw up to $5,000 from a retirement account penalty-free in order to help with the costs of a birth of a child or an adoption.
Remember to review your Estate Plan in light of the recent changes to the law. If a stretch IRA is part of your Estate Plan, call our office at (509) 468-0551 to determine if any revisions are needed