The spending and appropriations bill signed by President Trump in late December makes major changes to retirement plans. The new law is designed to provide more incentives to save for retirement, but it may require IRA participants to rethink some of their planning.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, included in the appropriations bill, changes the law surrounding retirement plans in several ways:
- Stretch IRAS. Under the previous law, a non-spouse beneficiary of your IRA could choose to take distributions from the plan over his or her lifetime and pass any remaining account value on to future generations – commonly called the “stretch” option. This allowed the money received by your children or other younger family members to grow tax-deferred over the course of the beneficiary’s lifetime and perhaps to be passed on to his or her own beneficiaries. The SECURE Act now requires most non-spouse beneficiaries of an IRA to withdraw all the money in an inherited IRA within 10 years of the IRA holder’s death. The elimination of the stretch IRA will increase taxes paid by the beneficiary on the account. If the beneficiary is a minor (think grandchildren) the minor is required to withdraw based on his/her life expectancy until reaching the age of majority at 18 years and then at that time he/she must take the remainder of the account out over the 10 year period. Lifetime stretchout of benefits are still allowed for “Chronically Ill” and “Disabled” Beneficiaries who meet the criteria and beneficiaries who are less than 10 years younger than the decedent (such as siblings). These provisions will apply to those who inherit IRAs on or after January 1, 2020. The ability of the Spouse to roll-over the decedent's plan into his/her own plan, to take withdrawals over his/her life expectancy and to name his/her own beneficiaries for the plan has not changed.
- Required minimum distributions. Under prior law, you have to begin taking distributions from your IRAs beginning when you reach age 70 ½. Under the new law, individuals who are not 70 ½ at the end of 2019 can now wait until age 72 to begin taking distributions.
- Contributions. The new law allows workers to continue to contribute to an IRA after age 70 ½, so now it is the same as the rules for 401(k)s and Roth IRAs.
- Employers. The tax credit businesses get for starting a retirement plan is increased and the new law makes it easier for small businesses to join multiple-employer plans.
- Annuities. The newly enacted legislation removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan. This is a boon to insurance companies.
- Withdrawals. The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances.
Given these changes, some plan owners may need to reevaluate their withdrawal strategies and their estate plans. Often people have used stretch IRAs as an estate planning tool to pass assets to their beneficiaries in a tax deferred package. Of key importance, you may have named a trust as an IRA’s beneficiary, and these trusts in all likelihood will now have unintended tax consequences under the new rules. If a stretch IRA or a trust that receives retirement benefits is part of your estate plan, consult with your attorney to determine if you need to make changes.