Dedicated Attorneys Providing Advice on the SECURE Act for Clients in the Cape Cod Area
The SECURE Act was officially enacted into law on January 1st, 2020, and it is now the largest retirement reform since the 2006 Pension Protection Act. The bill is a bipartisan effort to make retirement savings more accessible for the lower-income population. The Act has 29 provisions in total, with some aspects that deeply affect the retirement plans of many Americans. It is expected to generate 16.4 billion dollars in tax revenue for the government.
The most notable changes include the elimination of “stretch IRAs” with some exceptions, adding a 10-year cap for distributions of inherited IRAs to most non-spousal beneficiaries. Most Americans with retirement accounts and trusts are encouraged to review their current plans with a professional, as chances are they will need to be revised or updated to accommodate for these changes.
What Are The Most Important Changes Brought By the Secure Act?
There have been numerous changes that affect retirement accounts across the country. The Secure Act has brought some benefits such as the ability for parents to withdraw up to $10,000.00 penalty-free in the year of birth or adoption of a child (even though the money is not free from income tax). Another provision also allows up to 10,000.00 dollars to be taken from a 529 account to repay student loans.
But perhaps the measures that have most Americans worried are the ones that affect their ability to benefit from distributions resulting from an inherited “Stretch IRA”. Before the act was passed in congress, non-spousal beneficiaries of an inherited IRA were able to reduce tax payments on yearly IRA distributions by “stretching them out” over their lifetime. With the new rules, a decedent’s IRA account must be completely emptied at the 10th year after the death of the original owner. Without proper planning, this means non-spousal beneficiaries can be hit with a significant tax bill at year 10 and placed in a higher income-tax bracket that year.
This new rule only applies to beneficiaries who have been deemed ineligible to stretch out their distributions. Spouses, individuals not more than 10 years younger than the decedent, young children (until they reach the age of majority), disabled, and chronically ill beneficiaries are exempt from the new rule and may continue taking distributions without the need to deplete the account by the 10-year mark.
Another provision allows individuals to continue contributing to their IRA accounts regardless of their age, as long as they have earned income. Previously, individuals were no longer allowed to make contributions after the age of 70 ½. However, it still allows for annual charitable contributions of up to $100,000.00. That amount is reduced according to the number of aggregate contributions made to an IRA after age 70 ½.
How Do The New Rules Affect Trusts?
The removal of RMDs (required minimum distributions) stretch provisions will likely affect pass-through trusts, also known as a conduit IRA Trust. Traditionally, this type of trust includes language that bars a beneficiary from making withdrawals in excess of what is allowed by the trust every year. With non-spousal beneficiaries now being required to withdraw all funds at the 10-year mark, this can quickly become a nightmare if a conduit IRA Trust is not updated to allow for the 10-year final distribution required by the new rules.
This also means that the Secure Act makes the option of assigning a trust as the beneficiary of an IRA no longer the best choice for everybody. IRA owners may now want to revisit their estate plans and make modifications to their beneficiary designation and revocable trust provisions to ensure maximum benefits will still be provided to heirs in spite of the changes made by the Secure Act.
If you are unsure about how these recent changes affect you, or would like to gain a deeper understanding and get all the relevant details explained to you by one of our attorneys, the most sensible thing to do is to contact The Law Offices of Boyd & Boyd.
Call us at (508) 775-7800 and request a free initial estate planning consultation. We are here to help you navigate through the most recent changes in law and help you make the best decision to protect your wealth and your family.