SECURE Act Significantly Changes Required Minimum Distributions for Inherited Retirement Assets
Federal legislation known as the “SECURE Act” (the “Act”) was signed into law on December 20, 2019. The Act makes substantial changes to the rules governing IRAs and other qualified plans. Participants born after June 20, 1949 may now defer withdrawals (known as required minimum distributions, or “RMDs”) until age 72, an increase from age 70½ under prior law. In addition, the Act eliminates the maximum age for making contributions of earned income to IRAs. Most significantly, however, for estate planning purposes, the Act curtails the ability of most beneficiaries to “stretch” payments from an inherited IRA or other qualified retirement plans over the beneficiary’s life expectancy.
Under prior law, many non-spouse beneficiaries of retirement accounts could withdraw the inherited retirement account assets gradually by taking distributions (the RMDs) over the beneficiary’s life expectancy, if longer than that of the participant. The Act effectively eliminates this option for participants dying after January 1, 2020, by imposing a maximum payout period of ten years for most non-spouse beneficiaries. By requiring retirement account assets to be distributed in their entirety within ten years of the participant’s death, the assets may be subject to income tax in the hands of beneficiaries much more quickly than under prior law and may push the beneficiary into a higher income tax bracket than would have been the case with payout based on the beneficiary’s life expectancy. In addition, the ten-year period results in a significantly shorter period for the retirement assets to grow on a tax-deferred basis. Spouses may continue to take distributions from inherited retirement accounts based on their own life expectancy, as may certain other limited classes of beneficiaries, including disabled or chronically ill individuals, beneficiaries who are not more than ten years younger than the participant, and minor children of the participant (until the children reach the age of majority).
The income tax impacts of the Act will be very significant for beneficiaries of substantial retirement accounts. Clients with retirement accounts payable to a trust may require revisions to their trust documents. Please contact your Shipman & Goodwin estate planning attorney if you would like a review of your estate plan in this regard.
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