SECURE Your Planning for the New Decade
Updated: Apr 28
By: Juliya L. Ismailov and William L. Bricker
On December 20, 2019, President Trump signed into law The Further Consolidated Appropriations Act (H.R. 1865, PL 116-94), funding the government through Fiscal Year 2020. This Act contains the much-discussed SECURE Act, standing for Setting Every Community Up for Retirement Enhancement (the “Act”), generally effective as of January 1, 2020.
The changes under the new law affecting various types of qualified savings accounts, discussed below, are mostly positive for the taxpayers. However, for estate planners, one change has overshadowed them all: the acceleration of post-death taxable distributions to beneficiaries of a retirement account.
Previously such beneficiaries were allowed to “stretch-out” the distributions of the account balance over their respective lifetimes. For example, assuming that the beneficiary of a decedent’s IRA is a 30-year old daughter, the payout could have been over 51 years, her actuarial life expectancy. Now, this period is limited to 10 years, with certain exceptions discussed below. Such a drastic acceleration of income has caused consternation for forward-thinking individuals with substantial retirement savings, and their planners.
Below is a summary of the 6 changes implemented by the SECURE Act that are notable from an estate planning perspective:
1. Post-Death RMD Stretch-Out Period Limited. As mentioned above, the SECURE Act modifies rules applicable to required minimum distributions (“RMDs”) from the retirement account made after the employee dies. Under prior law, if an employee (or IRA owner) died before age 70½, required distributions to a designated beneficiary would have been paid over the life or life expectancy of the designated beneficiary. Under the SECURE Act, the RMDs must be distributed within 10 years after the date of death. This rule applies without regard to the age at which the employee (or IRA owner) died.
There is an exception from the 10-year rule for an eligible designated beneficiary. If the exception applies, the RMDs can be made, as before, over the life or life expectancy of such beneficiary. Such excepted beneficiaries are: (1) the surviving spouse (who has to start taking RMDs from the date the decedent would have reached age 72); (2) a minor child (after such child reaches majority, the balance must be distributed over 10 years); (3) a chronically ill individual as defined under the Code; or (4) an individual who is not more than 10 years younger than the employee or IRA owner.
2. No Maximum Age for Non-Roth IRA Contributions. Under the new law, an individual over the age of 70½ can continue to make contributions to an IRA. This is a change for traditional IRAs, whereas Roth IRAs did not previously have a maximum age limitation for contributions. The corresponding side-effect of this change is that the new law also reduces the amount of the annual qualified charitable distribution (QCD) exclusion available, generally, by the amount of the deductible IRA contributions made after age 70½.
3. Penalty-Free Withdrawals for Births or Adoptions. A distribution from a qualified IRA is included as income in the year of such distribution. If made before age 59½, such distributed income is also subject to a 10% early withdrawal penalty. The new law provides an exception to such penalty for a "qualified birth or adoption distribution" made within one year of such qualified event. The maximum that can be withdrawn without the penalty is $5,000 per parent. The withdrawn amount can also be later re-contributed to the IRA, subject to certain exceptions.
4. Higher Age for Required Minimum Distributions. Under the new law, the age at which an employee is required to start taking RMDs from his or her retirement account has been raised from 70½ to 72.
5. Expanded Section 529 Plans. Under prior law, educational expenses of up to $10,000 annually are eligible for tax-free distributions from Section 529 Plans. Such expenses include tuition, fees, books, supplies, computer and internet tools, room and board for at least half-time students required by the institution, and/or special needs services related to enrollment in such institution. An eligible institution includes an elementary, secondary or post-secondary public, private, or religious school.
Under the SECURE Act, eligible expenses now include those associated with registered apprenticeships and up to $10,000 of qualified student loan repayments (principal or interest), including such repayments distributed to a sibling of a designated beneficiary. However, no interest deduction is allowed on interest paid from a tax-free 529 distribution.
6. Portability of Lifetime Income Options. The SECURE Act allows greater portability for an existing “lifetime income investment” (generally, an annuity) to another qualified annuity contract provided through an existing or another employer-sponsored retirement plan. Such qualified distribution has to be made within 90 days of an investment becoming no longer authorized under a plan.
Estate planners are heavily focused on the elimination of the stretch-out option for inherited IRAs. While the new rules limit the stretch-out strategy, exceptions for spouses, minor children, chronically ill beneficiaries or the decedent’s peers in age still provide planning opportunities and may spur further creative strategies. That said, other than the change to the post-death distribution period intended to generate substantial tax revenue—$15.7 billion over the next decade, as estimated by the Congressional Research Service, the rest of the changes are favorable to the taxpayers, though their compensating value cannot be quantified.
In this New Year starting off the new ‘20s, let foresight, not hindsight, be 20/20. With the arrival of the SECURE Act, it is an auspicious time to review your savings account strategies and estate planning documents to maximize tax-efficient contribution and distribution decisions affecting yourself and the next generation.