The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, which went into effect in 2020, has far-reaching impacts on retirement accounts and taxes. The SECURE Act may also affect your estate plan and how your beneficiaries receive inheritance from your retirement accounts.
What is the SECURE Act?
Before we get into how the new SECURE Act may impact your estate plan, let’s take a look at how this legislation works.
The main goal of the law is to help prevent older retirees from running out of money. Since people are living longer, there have been many cases where people have outlived their retirement funds.
The SECURE Act also aims to encourage saving for retirement. According to the Bureau of Labor Statistics, a 2020 finding revealed that only 55% of adults have a workplace retirement plan. And a study by Vanguard found those ages 65 and older had an average of only about $58,000 in a 401(k).
The main provisions of the SECURE Act are:
- The required minimum distribution age increases from 70-1/2 to 72
- The IRA (Individual Retirement Account) age limit for contributions has been eliminated
- Non-spouse beneficiaries of retirement accounts are mandated to completely withdraw funds within 10 years of the account owner’s death
- Enables long-term, part-time employees to sign up for 401(k) plans
- New parents can take penalty-free withdrawals up to $5,000
What the SECURE Act Means for Your Estate Plan
The biggest impact by this new law on estate plans is the requirement that all distributions from an inherited retirement account be completed by the non-spouse beneficiary within 10 years of the account owner’s death. The result could be that the beneficiary faces huge income tax payments because withdrawals can no longer be stretched out over their lifetime, which, depending on a beneficiary’s age, could be decades.
Prior to January 1st, 2020, when the SECURE ACT went into effect, a non-spouse beneficiary was required to take minimum annual required distributions from an inherited account. These are typically small amounts, allowing remaining assets to grow tax-free over the life expectancy of the beneficiary. Although yearly required minimum distributions are not mandated under the SECURE Act, the account must now be depleted by the end of the 10-year period.
The new law spells the end of the so-called stretch IRA where required minimum distributions are made over the beneficiary’s lifetime.
There are exemptions to the 10-year provision, for example, if the beneficiary is:
- A spouse
- A disabled or chronically ill person
- A minor child (not grandchildren)
- No more than 10 years younger than the decedent
In these cases, the beneficiaries can withdraw funds over their lifetime.
Amending Your Estate Plan & Creating a Trust
If you have an estate plan that bequeaths your retirement accounts to non-spouse beneficiaries, you may need to amend it, particularly your Will or Trust, to address the SECURE Act’s new rules.
A Trust allows control of assets. For example, if a beneficiary is someone who may not be responsible with money, the Trustee can distribute small amounts when needed to protect that beneficiary from making bad decisions. Also, a Trust protects against creditors, is not subject to probate, and typically shelters estate assets from high income taxes.
If you haven’t reviewed your estate plan in a while, now is the time. Make sure your Trust and Will address the new SECURE Act requirements so that you and your beneficiaries are protected.