How does the SECURE Act affect retirement accounts?
At the beginning of 2020, the SECURE Act was signed into law. SECURE stands for Setting Every Community Up for Retirement Enhancement.
Who is affected by the SECURE Act?
Anyone who has an IRA, 401(k) or 403(b) account is affected by this law. Basically, people who have retirement accounts set up will be affected in some way. If you’ve been working toward retirement, we can help you understand the implications of this new law. Our attorneys stay informed of changing laws and circumstances to help people plan effectively for estate allocation and to ensure their wishes are known.
What are the upsides?
Two main positives are coming from this newly enacted law:
RMD age increased – The minimum age for making Required Minimum Distributions (RMDs) was raised from age 70 1/2 to age 72, thus allowing people who don’t want to start taking money out as a distribution to now wait until age 72.
Contribution age restriction eliminated – This means people can keep contributing to retirement accounts no matter what their age is.
Downsides and exceptions
One downside is that beneficiaries must withdraw the full remaining balance from the inherited retirement accounts within 10 years of the original account owner’s death. The withdrawals must be completed within 5 years when the beneficiary is not a “designated beneficiary.”
Withdrawal exceptions are made for spouse of the decedent, beneficiaries whose age is within 10 years of the decedent, individuals who are disabled and people who are chronically ill.
How are my trusts are affected?
People set up trusts to protect their assets for those who will inherit them. The SECURE Act has changed two types of trust provisions, as follows:
Conduit trusts – Any trust that was set up using this structure will require that full retirement benefits distributions occur within 10 years of the decedent’s passing. Depending on the precise language of the trust, distributions may be made in a lump sum in year 10, which can impact the estate plan.
Accumulation trusts – When a grantor does not want a beneficiary to receive the entire benefit plan distribution, accumulation trusts can be used to permit the Trustee to retain the benefits in the trust. These provisions are sometimes added to trusts to account for retirements assets being distributed to beneficiaries, including minors, people with special needs and other designees. The accumulation stipulation means these beneficiaries will receive required minimum distributions (the distributions will be accumulated) and the income tax on the undistributed amount is paid at the trust level.
Our law firm can answer your questions about the SECURE Act. Schormann Law Firm, LLC, helps people understand the tax implications and consequences of their estate planning decisions. We can help you too.