Important Changes to the Tax Code for Retirement Accounts

As part of the spending bill passed by Congress and signed by the President in December 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (otherwise known as the “SECURE Act”) is now law and has been in effect since January 1, 2020. This law changes the way required minimum distributions in IRAs and Roth IRAs are treated as you age as well as when they are inherited by your beneficiaries. Prior to the SECURE Act, owners of an IRA were required to begin taking required minimum distributions (RMDs) from their IRAs at age 70½. Once the IRA holder passed away, the RMDs a non-spouse beneficiary had to take were determined based on the life expectance of the beneficiary. For example, if you designated a 45-year old child as a beneficiary of your IRA, he or she may stretch those RMDs across his or her life expectancy, which allowed beneficiaries to stagger income taxes across a larger period of time while taking advantage of tax-free growth on funds remaining in the IRA.

After the passage of the SECURE Act, IRA owners are now allowed to postpone RMDs until age 72, allowing more time for tax-free growth for the account owner. This law removes the prohibition on IRA contributions after age 70½, allowing individuals to contribute to their IRAs for a longer period. Although this is good for those trying to reduce their taxable income for as long as possible, it could certainly result in larger IRAs at time of death, which will be passed to your beneficiaries and subject to their income tax calculations.

The Effects of the SECURE Act on inherited IRAs

Under the SECURE Act, IRAs and Roth IRAs, with some exceptions, must be paid to the designated beneficiaries within ten years following the owner’s death. The entire balance of an inherited traditional IRA will be income taxable to the beneficiary within ten years following the owner’s death. Exceptions to this ten-year rule include beneficiaries who are the owner’s spouse, the owner’s minor child, disabled, chronically ill, or are less than 10 years younger than the account owner. If one of these exceptions are met, or if the IRA is left to a trust of which one of these persons is the direct beneficiary, the previous life expectancy rule will apply.

What About your Existing Trusts?

If you have a trust as a beneficiary of an IRA, it is important to think about how this law will affect the tax ramifications for your beneficiaries following your death. If you have minor children or children with disabilities, you can create a direct beneficiary trust or supplemental needs trust for the benefit of that person to avoid the new ten-year rule. If you have not done so recently, this would be a good time to have your trust reviewed to ensure that it is compliant with this new law. It is important to be sure that tax calculations are still advantageous to your beneficiaries.

What Should I Do?

Give us a call to schedule an appointment to review your estate plan ESPECIALLY IF YOU HAVE NAMED TRUSTS AS YOUR BENEFICIARIES and to discuss any questions you may have about your retirement plans. If you have traditional or Roth IRAs, this is a great time to review your existing beneficiary designations and estate plan with a qualified professional.