Effective January 1, 2020, Congress made a number of major changes to IRAs and 401(k)s with the passage of the SECURE Act ("Setting Every Community Up for Retirement Enhancement"). Some changes are of great benefit to seniors but others will negatively impact beneficiaries and call for an immediate update to your estate plan.
Here is a summary of the changes:
Required Distribution Will Now Start at Age 72:
The starting age for Required Minimum Distributions (RMDs) is now age 72, up from age 70 1/2. With people living longer, this allows the IRA or 401(k) to grow tax-deferred for an extra year and a half before the owner is required to start taking distributions.
Elimination of Contribution Age Cap:
An IRA owner can continue to contribute to their IRA at any age as long as they are working. Previously, no additional contributions could be made after age 70 1/2.
A number of provisions are intended to increase participation in 401(k)s including incentives for small businesses, expanding to some part-time workers, and increasing annuity options.
Elimination of Stretch IRAs:
After an IRA owner’s death, most beneficiaries (other than a spouse) will now be forced to withdraw the entire IRA within 10 years of the owner’s death and pay the required income taxes on those withdrawals. Previously, these beneficiaries could stretch the withdrawals out over their expected lifetime and continue to defer income taxes. This change does not apply to beneficiaries who are surviving spouses, minor children, chronically ill, disabled, or no more than 10 years younger than the deceased IRA owner.
For most nonspouse beneficiaries, the elimination of the stretch IRA will result in beneficiaries likely paying increased taxes on their inherited IRA more quickly.
The elimination of the stretch IRA and the likely increased taxes to beneficiaries may require immediate changes to your estate plan. It is now even more important to consider naming trusts as beneficiaries of your IRAs rather than leaving the account outright. And if you already have a trust set up in your will for your IRAs, that trust likely needs to be revised so that it still accomplishes your goals in this new IRA environment.