The SECURE Act passed in late December. The SECURE Act changes some lifetime rules, but the biggest change concerns rules for beneficiaries.
The “Secure Act” was part of a larger law that passed with (rare) bipartisan support in late-December 2019. It is effective January 1, 2020, for most purposes. This is a series of articles on the Secure Act. This first article looks at the basics of the Secure Act.
What does the Secure Act do?
The Secure Act does many things, but here are a few of the biggest changes. First the good news:
- It changes the age at which you must start withdrawing from your IRA or retirement plan. It was age 70 ½ under prior law while under the Secure Act it increases to age 72. This is a good change because it allows you to keep money in your plan longer. Remember, it can grow tax-deferred while it is in the plan.
- It allows you to contribute to a traditional IRA past age 70 ½ if you have “earned income” from employment rather than from investments. Again, this is a good change.
Now the bad news:
- It accelerates the timing of when most beneficiaries must take distributions from your IRA or retirement plans after you die. This is the painful part of the Secure Act. It doesn’t necessarily increase the tax they’ll pay, but it means they’ll have to pay it sooner in most circumstances.
Under the Secure Act, most people designated as beneficiaries of IRAs and retirement plans of people dying in 2020 and beyond must take all distributions from the plan by the end of the 10th year after the death of the plan Participant. Prior to the Secure Act, the beneficiary would have been required to take distributions over their own life expectancy, which could have been many decades, depending on the age of the beneficiary at the Participant’s death. So, this substantially accelerates distributions for the typical beneficiary.
Some beneficiaries are considered “eligible” beneficiaries and don’t face the 10-year rule, but the old rules continue to apply. Eligible beneficiaries are:
- The spouse of the plan Participant. Just like under the old rules, the spouse can take it as an inherited IRA using their own life expectancy or can choose to roll it over into their own IRA.
- A child of the Participant under the age of majority (typically 18). There are two caveats here. First, it must be a child of the Participant, not just any minor child. Second, once the child reaches the age of majority, the 10-year rule applies at that time.
- A person who is medically disabled or chronically ill.
- A person who is less than 10 years younger than the Participant.
What does this mean for you?
During your own lifetime, you don’t have to start taking distributions until age 72, rather than age 70 ½. Otherwise, you’ll take distributions according to the same schedule as in the past, based on the “Uniform Table” which considers your life expectancy (and the life expectancy of another person 10 years younger than you).
Your beneficiaries will be required to pull out retirement plan benefits over a 10-year period (unless they fit in one of the exceptions above). In other words, they won’t get as much of an income tax deferral as in the past. This means your beneficiaries will be required to pay the income tax due on the assets (if any) faster than in the past. It doesn’t necessarily increase the tax they’ll owe, but it means they’ll owe it sooner.
The next article in the series examines some planning strategies for dealing with the Secure Act.
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