The most sweeping changes to retirement legislation in almost 15 years were passed by the U.S. Senate yesterday, December 19, 2019. The House of Representatives had already passed the bill and President Trump is expected to sign the bill into law.
The biggest impact on retirees and their beneficiaries will be as follows:
Required Minimum Distributions (“RMDs”)
Under current law, individuals who own a qualified plan (401k, IRA) must begin to take distributions in the year in which they reach age 70 ½. These distribution amounts are based on a Uniform Table published by the IRS and are subject to ordinary income.
The SECURE Act increases the age when RMDs must begin to age 72. That is a benefit to taxpayers who wish to continue to accomplish tax-free growth inside the qualified plan and defer income tax on distributions.
Stretch Feature for Beneficiaries is Limited to 10 Years
When an individual who owns a qualified plan dies, the beneficiary of the qualified plan must receive the qualified plan proceeds and recognize ordinary income upon receipt. Under current law, a beneficiary can delay or “stretch” distributions over the remaining life expectancy of the beneficiary. This allows for maximum tax-free growth and income tax deferral. For example, a 30-year-old child who inherits his parent’s IRA can defer distributions and income tax over 53 years – and continue tax-free growth on the amounts remaining in the IRA.
The SECURE Act eliminates a non-spouse beneficiary’s ability to stretch the distributions over the beneficiary’s remaining life expectancy. Under the new law, a non-spouse beneficiary must withdrawal the entire plan within 10 years. The 30-year-old beneficiary referenced above will lose 43 years of tax deferral under the SECURE Act.
The new law is not retroactive so beneficiaries already receiving benefits under a stretch IRA can continue. The law is applicable for any person inheriting a qualified plan on or after January 1, 2020.
What to Do
Individuals may want to revisit their Estate Plan and in particular the beneficiary designations for qualified plans. Those who have named a Trust as a beneficiary will need to understand the SECURE Act’s impact on such designations.