At the end of 2019, Congress passed new rules governing retirement accounts known as the SECURE Act, an acronym standing for Setting Every Community Up for Retirement Enhancement. A big part of the bill encourages small employers to band together to offer retirement plans, which is the reason for the title. But here’s what may affect you and your family:
- Later Required Beginning Age. For those who have not already reached age 70 1/2 by the end of 2019 (meaning they were born after June 30, 1949), they can delay taking their required minimum distributions until the April 1st of the year they reach 72, rather than 70 1/2. If you were born after June 30, 1949, you can still choose to withdraw without penalty, other than paying taxes on the amount withdrawn, any time after age 59 1/2, you just don’t have to do so quite as early.
- A Shorter Time Period for Withdrawing from Inherited IRAs. Up until now, anyone who inherited a retirement plan who was not a spouse of the deceased owner had to begin taking minimum distributions the following year, but could take them out based on their own life expectancy, meaning that a younger person could stretch out the withdrawals and enjoy the tax deferral for many years. Under the new rules, with some exceptions, inherited IRAs must now be entirely withdrawn within 10 years of the death of the initial owner. This restrictions only applies to those retirement plans inherited after 2019.
- The Exceptions. The New Inherited IRA rules don’t apply to spouses of the deceased owner who can continue to convert inherited IRAs to their own ownership. In addition, there are exceptions for:
- minor children,
- individuals with disabilities and chronic illnesses, and
- those who are less than 10 years younger than the original owner.
These beneficiaries can continue to stretch withdrawals based on their own life expectancies.
- You Can Keep Contributing if You Keep Working. Under the old rules, those over age 70 1/2 who continued to work could continue to contribute to their work-related 401(k) plans and Roth IRAs, but not to their own IRAs. Now they can continue to contribute to traditional IRAs as well. Of course, after age 72, this creates the interesting situation of continuing to contribute at the same time you’re required to withdraw.
The New Rules and Trusts
While these new rules effect no changes for planning with respect to spouses, they may for children and others. Some parents provide for continuing trusts for their children and grandchildren in order to provide creditor or divorce protection or for special needs planning purposes. These are drafted as “accumulation” or “conduit” trusts under complex retirement plan rules. The new rules won’t affect “accumulation” trusts, but some parents may want to change their “conduit” trusts.
“Conduit” trusts get their name because they provide that any required minimum distributions from retirement plans held by the trusts must be distributed annually to the beneficiaries. Parents may have agreed to this provision knowing that such distributions will be relatively small each year, since they’re stretched out over the beneficiary’s lifetime. In some instances, they may not want larger distributions made during the first 10 years after their deaths, as would be required as the trusts are currently drafted.
Undoubtedly, unanticipated results will arise as the new rules affect real-life situations. We’ll continue to better understand the impact of the new rules and let you know how the work. Also, don’t hesitate to be in touch or post any questions you might have. We’ll do our best to find answers.