The Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) represents the first major retirement legislation since 2006. The SECURE Act was signed into law on Dec. 20, 2019, became effective Jan. 1, 2020, and includes noteworthy changes to retirement plan rules, along with the following taxpayer-friendly provisions:
- Increased Age for Required Minimum Distributions: The age for commencing required minimum distributions from retirement plans and individual retirement accounts (IRAs) has increased from 70½ to 72.
- No Maximum Age for Retirement Contributions: Employees of any age with earned income will be eligible to contribute to traditional IRAs.
- Expanded 529 Education Savings Plans: The definition of qualified higher education expenses now includes qualified student loans and certain apprenticeship programs (up to $10,000 annually).
However, the most significant provisions of the SECURE Act are the new limitations imposed on beneficiaries of inherited IRAs, reducing their ability to "stretch" required minimum distributions over their lifetimes following the death of the original account holder.
Prior to the SECURE Act, both spouse and non-spouse beneficiaries of inherited IRAs were generally permitted to take distributions over the course of their own lifetime (or life expectancy). As beneficiaries only paid income tax on the distributions when they were received, this enabled beneficiaries (especially younger individuals) to "stretch" out the tax-deferral benefits of the account over a much longer period of time.
The SECURE Act preserves this benefit for spousal beneficiaries, but limits the distribution period for non-spouse beneficiaries to a maximum of 10 years. There are exceptions for beneficiaries who are minor children, disabled, chronically ill or less than 10 years younger than the account owner, who are permitted to continue to take distributions over their lifetime (with respect to a minor child, the 10-year rule commences upon his or her attaining the age of majority). The SECURE Act does not affect the look-through treatment of certain trusts that receive retirement plan proceeds. Accordingly, the differing treatment of spouse and non-spouse beneficiaries will pass through to trust beneficiaries as well: a poor result from a tax perspective as well as for creditor protection.
Beneficiary designation forms should be reviewed to ensure that they meet the account owner's objectives, and trusts that will receive retirement assets should be examined in light of these significant rule changes. There are several strategies to mitigate the new rules implemented by the SECURE Act, including naming a charitable remainder trust as a beneficiary of your plan.