Many of our clients hold a significant portion of their estate in retirement account assets. Historically, the primary benefit of leaving IRA assets to heirs was that, upon the owner’s death, his or her designated beneficiary could transfer the IRA funds into an inherited IRA and stretch distributions from such account over the beneficiary’s life expectancy. This has always been a great strategy to defer the income taxation of distributions from IRAs. However, with the recent passing of the “Setting Every Community Up for Retirement Enhancement Act” (the “SECURE Act”) in December 2019, distributions from IRAs have been substantially overhauled both during the owner’s lifetime and after his or her death when the assets pass to the beneficiaries.
Under prior law, an individual who reached the age of 70½ could no longer contribute to a traditional IRA and was required to start taking annual minimum distributions from his or her traditional IRA based on his or her life expectancy. With the passage of the SECURE Act, an individual does not need to start taking minimum distributions until the age of 72 and, as long as the individual is still working, he or she can continue to contribute to his or her IRA regardless of age. With many individuals continuing to work in their 70s, this change allows those individuals to contribute more to their retirement plans.
The bigger impact of the SECURE Act will be felt by the IRA beneficiaries after an IRA owner passes away. Under prior law, a non-spouse beneficiary of an inherited IRA was required to start taking minimum distributions the year from the inherited IRA following the owner’s death (if the account owner had already started taking withdrawals from the IRA). Under this prior law, the amount the beneficiary was required to withdrawal was based on the beneficiary’s life expectancy. Often, an IRA beneficiary is younger than the initial IRA account owner and, therefore, has a longer life expectancy. Therefore, distributions from the inherited IRA could be stretched out over a longer period of time — essentially over two lifetimes — resulting in a significant deferment of the income taxation of such assets.
Under the SECURE Act, the “stretch” component of inherited IRAs is substantially changed. Instead of required minimum distributions based on a beneficiary’s age, under the SECURE Act, all IRA beneficiaries will be required to withdraw all of the funds from the inherited IRA by the end of the 10th year following the owner’s death. This means that most inherited IRA beneficiaries will need to take larger distributions over a much shorter period of time. This also means that the IRA beneficiary will have much more significant taxable income, as they will be required to report all IRA income over 10 years, rather than their lifetime.
Importantly, there are a few exceptions. If the IRA owner’s surviving spouse is the beneficiary, he or she will not be subject to the 10-year required withdrawal period. In addition, if the beneficiary is not more than 10 years younger than the owner, is disabled or chronically ill, or is a minor child, such a beneficiary will not be subject to the required 10-year withdrawal period.
The SECURE Act implements some additional important changes. Now long-term, part-time employees working over 500 hours per year can contribute to company retirement plans, reduced from 1,000 hours under prior law. In addition, to help with expenses associated with a new baby, the SECURE Act allows an individual who has just had a baby or adopted to withdraw up to $5,000 from his or her retirement account up to a year after the baby’s birth or adoption. Lastly, the SECURE Act broadens the expenses covered under a 529 Plan to include apprenticeships and some student debt.
If you would like to discuss how the SECURE Act may specifically impact your estate plan, please call our office at 856-489-8388 to schedule a consultation or contact us here.