The Setting Every Community Up for Retirement Enhancement Act of 2019 became effective on January 1, 2020, but you may have heard or read about it as the SECURE Act. The federal legislation could significantly affect your retirement accounts and estate planning, so it pays to get acquainted with its provisions to determine how it affects you.
Highlights of the SECURE Act
According to the U.S. Bureau of Labor Statistics, slightly more than half of workers in private industry have access to a retirement plan through their employers. One of the goals of Congress in passing the SECURE Act is to encourage more business owners to make retirement plans available to their workers. It seeks to accomplish this by making it easier for small businesses to establish and administer retirement plans while also expanding eligibility to participate in employer-administered plans to employees who only work part-time.
If you currently participate in a retirement plan, other provisions of the SECURE Act address minimum distributions and establish new rules for contributions to IRAs. It also expands allowable distributions from 529 savings plans.
New Distribution Rules for Inherited IRAs
If you inherited an IRA before January 1, 2020, the rules pertaining to distributions from it have not changed. You may continue to time distributions to extend over the course of your lifetime. The rules dramatically change under the SECURE Act for an IRA inherited after the effective date of the new law.
The new rules now require that distributions be completed within 10 years in most situations. A surviving spouse may still “stretch” out the payment of the IRA and thus defer the income taxes to be paid, but in most other situations the distributions will have to be made within 10 years of the death of the IRA owner. If you have a trust designated as the beneficiary of your IRA, you will need to review the terms of the trust, to make sure that it is structured consistent with your wishes, understanding that all of the assets in the IRA will be distributed in 10 years or less and most trusts designed to receive IRA benefits were set up as “conduit” trusts to comply with the previous law. That means that as the IRA account is paid out over the required 10 year period, the trustee will, in turn, be distributing what is received to the trust beneficiary. Depending on the age and maturity of the beneficiary, that may not be acceptable.
Changes to Required Minimum Distribution Age and New IRA Contribution Rule
Studies show that more people continue working beyond retirement age than ever before, but the prior law prevented them from contributing to a traditional IRA upon reaching 70 ½ years of age. The SECURE Act changes that by eliminating the age restriction to allow anyone of any age to make contributions to an IRA.
Other age-related provisions of the law address required minimum distributions. Anyone reaching age 70 ½ in 2020 need not take a required minimum distribution. They may delay it until reaching 72 years of age. The new distribution rule also applies to owners of qualified deferred annuity contracts.
More Liberal Distribution Rules Under Some Circumstances
The new law permits a distribution of up to $5,000 from an IRA or defined contribution plan to pay expenses related to the birth or adoption of a child. The distribution would not incur an early withdrawal penalty as would have occurred under prior law.
The SECURE Act provides more options for people with 529 education savings accounts. The money may now be used to pay for apprenticeship programs and costs related to homeschooling. As much as $10,000 from a 529 account may be used to repay student loans.
Use of a Charitable Remainder Trust and Irrevocable Life Insurance Trust to Stretch IRA
One planning technique that is being touted to achieve similar results to “stretch” IRA’s under the old law is the use of a charitable remainder trust (“CRT”) in combination with an irrevocable life insurance trust. Structured properly, the CRT is exempt from income taxes, so on receipt of the distribution(s) from the IRA, no income taxes are due. The CRT will then make payments to its beneficiary for a term of years or for life, with taxes being paid as those payments are received. At the beneficiary’s death, what remains in the CRT is distributed to one or more charities. If it is desired to replace all or part of the distribution going to charity, a life insurance policy on the life of the beneficiary is purchased in an irrevocable life insurance trust naming the beneficiary’s children and/or grandchildren as the beneficiary. As with all estate planning techniques, this is not for everyone but is available in the right circumstances to deal with the change in the law brought on by the enactment of the SECURE Act.
Speak to an Estate Planning Attorney
It is too soon to fully understand the implications of the many facets of the recently adopted SECURE Act, but you should review your IRA beneficiary designation and if there are any questions about how the SECURE Act will affect you have one of the estate planning attorneys at Magee & Adler go over it with you to determine how to take full advantage of it. Call us now at 562-432-1001 to schedule an appointment.