The “SECURE” Act: Time to Review IRAs and Estate Planning Documents

Do you have an IRA?  A new law, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), changed several provisions which may affect your estate planning.

The new law eliminates the age limit on when a plan participant can make contributions beginning in 2020.  It used to be after age 70 ½ no contributions to traditional IRAs could be made.

Starting in 2020, the new law also changes the age when required distributions must begin.  It is now age 72. It used to be 70 ½.

Those changes are positive for the IRA owner.  However, there are other changes which require review of your existing estate planning  which are new restrictions on inherited IRAs.

Before the new law, individual beneficiaries of retirement accounts (for simplicity, hereafter “accounts”) as well as “qualified trusts” could establish inherited accounts and withdraw the funds from those accounts over the beneficiary’s life expectancy (or the eldest beneficiary life expectancy in the case of a trust) This allowed the account funds to grow without being subject to income tax until they were distributed to the beneficiary.

With the new law, the entire inherited amount has to be withdrawn within 10 years from the account owner’s date of death.  This 10-year rule will significantly accelerate the payment of income taxes for most inherited accounts and will likely result in more income taxes as the beneficiaries are pushed into higher income tax brackets because of larger inherited retirement account distributions during, presumably, their higher earning years.

There are some exceptions to this rule:  surviving spouses, disabled or chronically ill individuals (as defined by federal law), and individuals less than 10 years younger than the retirement account owner. In addition, qualified trusts for the benefit of these individuals may also still use the longer payout allowed under previous law.

You should review your existing estate plan documents and beneficiary designations in light of these changes in the law.