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Estate Planning

The SECURE Act Makes Stretch IRAs Less Flexible

By Jeffrey D. Moss, Esq.

On December 20, 2019, while you were finishing your holiday shopping, Congress passed the Setting Every Community Up For Retirement Enhancement (SECURE) Act of 2019.  The SECURE Act became effective for events occurring after December 31, 2019.  This new law impacts many rules related to retirement plans, including mandatory withdrawal ages, treatment of beneficiaries, and the types of investments permitted by a retirement plan.

Here are some highlights of the SECURE Act:

  • For people born after June 30, 1949, the required minimum distribution date from retirement accounts is pushed back from age 70 ½ to age 72. This allows for up to two more years without mandatory withdrawals which can allow for more tax-free growth.
  • On the flip side, the use of the “stretch” IRA concept which allowed non-spouse designated beneficiaries to receive many years of tax deferred compounding is, in many situations, now limited to 10 years. Without getting into all the details, most IRA heirs, other than spouses, will be required to withdraw assets within 10 years rather than over their life expectancy.  Under the old rules, an account owner could name a younger child or grandchild as a designated beneficiary and obtain distributions over the lifetime of the much younger beneficiary, hence the “stretch”.

The surviving spouse will still have the same options available under current law.

With respect to minor children, there is a special rule for inherited accounts.  A minor child can accept distributions based upon their life expectancy until age 18 when at that point in time, there is an additional 10-year deferral which then mandates the entire account be distributed by age 28.  There is another special exception for minor children which defers the age of majority from 18 to up to age 26 if he or she has not completed a “specified course of education”.  The exceptions discussed above do not apply to grandchildren, if a grandchild is named a designated beneficiary, he or she will be required to have a 10-year payout even if the grandchild is under age 18 at the time of the account holder’s death.

  • There are other exceptions when beneficiaries are disabled or chronically ill individuals. If a designated beneficiary qualifies as a disabled or chronically ill designated beneficiary, he or she would still be able to obtain lifetime payout.  There is apparently a “certification rule” for disability and chronic illness.  It is unclear whether one has to be disabled or chronically ill at the date of account holder’s death or if a person becomes disabled or chronically ill during the 10-year period whether this alters the status of the payout.
  • Deferred compensation trusts such as conduit trusts and accumulation trusts may be negatively impacted by this legislation. Even in the case of a conduit trust which would require mandatory distributions to a designated beneficiary of his or her share of the subtrust, deferrals would be limited to 10 years rather than lifetime.  Thus, many people may have had expectations that their trust agreement would provide minimum distributions for the lifetime of children or grandchildren.  Individuals expectations now must change.

There are other changes resulting from the SECURE Act including permitting part time workers to participate in 401(k) plans, allowing IRA contributions after age 70 ½, allowing “small business owners” to receive a tax credit for starting a retirement plan, and allowing the withdrawal of 529 plan dollars to pay up to $10,000 in student debt over the course of a student’s lifetime.  There is expanded opportunities for annuities as investments.  ROTH IRA conversions may be favored in some situations.

The result of the SECURE Act is that all retirement account holders should review their beneficiary designation forms and estate plan documents and determine whether or not these new rules fundamentally alter his or her goals and objectives with respect to estate planning and retirement accounts.

Please do not hesitate to contact your Dawda Mann attorney if you have any questions related to the SECURE Act, your estate plan, and the impact of your beneficiary designations.