In the past, estate planners routinely advised clients to make their IRA or other retirement plan benefits payable to a designated beneficiary or to a see-through (conduit) trust, where the beneficiary or trust could withdraw benefits gradually by taking distributions over his or her life expectancy (or the life expectancy of the oldest trust beneficiary). With some life expectancies exceeding 30+ years for children after a parent’s death and sometimes 80+ years for grandchildren, this planning technique was extremely popular.
In an effort to create revenue and to prevent the build-up in the value of these qualified retirement accounts (the “Plans”), the federal appropriations bill enacted into law by Congress and the President in the final weeks of 2019 (i.e., the “Setting Every Community Up for Retirement Enhancement Act”, or SECURE Act) unexpectedly made changes to the federal tax code by placing restrictions on the payout periods and other provisions of these retirement plans. The most significant changes provide as follows:
- Allows many individuals to wait until age 72 to begin taking distributions from qualified retirement plans or IRAs (provided they have not already begun taking distributions)
- Removes the age restriction on contributions to traditional IRAs (non-Roth), so that older working individuals (past age 70 1/2) may continue to contribute to their retirement savings accounts
- Eliminates the ability of most retirement account beneficiaries to stretch out distributions of retirement assets over their life expectancies after the participant’s death, substituting a ten-year distribution timeline instead
- Allows a minority of designated beneficiaries such as spouses, minor children (not grandchildren) or disabled individuals to continue to take retirement benefits over their life expectancy (although children will be required to take full distributions within ten years of attaining majority)
- Changes the rules for inherited IRAs passing to conduit or see-through trusts, so that the entire retirement account must be distributed by December 31 of the tenth anniversary year of the participant’s death instead of being paid over the trust beneficiary’s life expectancy
- Applies the SECURE Act amendments to deaths after December 31, 2019, but when the original designated beneficiary under the pre-2019 plan dies, the SECURE Act rules apply to his or her own designated beneficiaries
The good news is that individuals who do not own retirement benefits or who are planning to leave their retirement benefits to charity are not affected by the SECURE Act.
The clients who are affected are those whose plans for retirement benefits include long-term stretch payouts (e.g., for children or grandchildren) or leaving retirement benefits in trust (either to obtain the stretch payouts or for creditor protection reasons). Those clients should contact their attorney and/or financial planner for assistance in determining whether any updates are necessary to their estate plan, their beneficiary designations or their retirement planning in general.