On December 20, 2019, President Donald Trump signed into law the SECURE (Setting Every Community Up for Retirement Enhancement) Act imposing a ten (10) year limit for most (but not all) non-spouse beneficiaries to spend down inherited retirement plans. Previously, non-spouse beneficiaries could elect to take required minimum distributions (“RMDs”) over such beneficiary’s life expectancy, rather than taking the entire benefit over the course of five (5) years thus deferring income taxes and permitting the retirement account balances to compound income tax free. This so-called “Stretch IRA” was an important post-mortem planning technique that is now lost to estate planners for all retirement plan owners dying after 2019.
Other notable changes to retirement benefits under the Secure Act include (1) moving back the start dates for Required Minimum Distributions from age 70 ½ to age 72, (2) expanding small employers’ capabilities to offer some form of retirement savings to employees thru tax credits and multiemployer plans spanning across different industries, (3) increasing annuity options inside retirement plans, and (4) removing age limitations on IRA contributions.
As for exceptions to the new SECURE Act ten (10) year payout rule, the SECURE Act does not impact a spouse’s right to rollover their deceased spouse’s IRA into a “spousal IRA” and there are exemptions provided for: (1) minor children (not grandchildren) up to the age of majority, (2) certain disabled and chronically ill beneficiaries, and (3) beneficiaries not more than ten (10) years younger than the IRA owner. Under the SECURE Act ten (10) year payout rule there are technically no RMDs so beneficiaries can withdraw any amounts they wish over the ten year period. The flip side of there being no RMDs is that the SECURE Act should impact those people with “Conduit Trusts” which were designed to take advantage of the stretch rules with annual distributions of RMDs and create a situation where beneficiaries have to take a lump sum payment of the entire retirement account on the tenth anniversary of the plan owner’s death.
If you have any questions regarding this Legal Alert, please contact Patrick J. O’Sullivan.
