The Setting Every Community Up for Retirement (“SECURE”) Act was passed by the House over the summer and seemed to stall in the Senate until mid-December when it got attached to an end of the year spending bill. The SECURE Act is a significant piece of legislation that has many different provisions for retirement savings, but in this article, I am going to focus in on the three that may have the most impact on our clients. There will be more to come on the other pieces over the next few months.

The ‘Stretch’ Retirement Account Eliminated                    

Stretch IRAs were commonly used as an estate planning tool for parents to pass retirement savings to their children and grandchildren, but the SECURE Act is changing how non-spousal beneficiaries will be treated. Before 2020, if an IRA owner named their child, grandchild, or other younger heir as the beneficiary of their retirement account, they could “stretch out” the benefit of tax deferred growth within that account.  Required Minimum Distributions (RMDs) were based on the beneficiary’s life span.  The younger the beneficiary, the lower the required distribution. Thus, the benefit of tax deferred growth far extended well beyond the decedent’s lifespan.

Under the terms of the SECURE act non-spousal beneficiaries are required to deplete their inherited IRA within 10 years of the owner’s death. RMDs are not mandated during the 10-year window, so this does allow some flexibility for tax planning adjusting their distributions accordingly.  This 10-year rule applies to all qualified plans: 401(k), 403(b), 457, ESOPs, 401(a) and defined benefit plans.

Stretching the benefit for tax deferred retirement accounts were a large part of many estate plans.  Accordingly, this is a good time to revisit and explore different strategies, including a pre-mortem and post-mortem tax analysis of the options.

RMD Start Age Increased to 72

On a positive note, the SECURE Act has delayed the starting age for required minimum distributions from 70 ½ to 72 allowing retirees a longer time to grow their retirement assets. Those who turned 70 ½ in 2019 will unfortunately not be eligible for this extension; it will begin with anyone who turns 70 ½ in 2020 and beyond.

Maximum Age for IRA Contributions Eliminated

The Traditional IRA had long been the only retirement account that would not allow any contributions after age 70 ½.  The SECURE Act has eliminated the age cap. Starting in 2020, workers of any age will be able to contribute to a Traditional IRA if they have earned income from wages or self-employment.   Active participation and IRA contribution deduction rules still apply for individual and spousal contributions, so it is best to check with your financial planner or accountant for your specific eligibility.

The SECURE Act made some of the most sweeping changes to retirement plan rules in recent history. These changes have also had a significant impact on how we look at estate planning. We will continue to write about its impacts on planning and saving going forward, but if you have any immediate questions, don’t hesitate to reach out to us!