The SECURE Act, enacted in December as part of the federal government spending bill, contains major revisions to the retirement plan rules.
Many changes are beneficial. For example, required minimum distributions (RMDs) can begin at age 72 rather than age 70½ for those born after June 30, 1949.
To pay for the changes, the Act accelerates when retirement plan account and IRA beneficiaries (both “IRAs” for short) must take distributions.
For many years, a beneficiary who inherits an IRA could take RMDs over the beneficiary’s life expectancy.
The Act eliminates RMDs, instead requiring that a beneficiary take a distribution of the entire IRA by December 31st of the tenth year after the IRA owner’s death.
Five exceptions to the 10-year rule allow the following beneficiaries to take RMDs over their life expectancy:
(a) the IRA owner’s surviving spouse;
(b) a child under the age of majority;
(c) a disabled individual;
(d) a chronically ill individual; and
(e) an individual 10 years younger, or less, than the IRA owner.
The exception for a minor child allows RMDs over life expectancy only until reaching the age of majority.
Then, the child must take a distribution of the account over 10 years.
Because accelerating distributions over a 10-year period bunches them into fewer years, federal and state income taxes will be paid earlier and at higher tax rates.
For those with smaller IRAs or multiple beneficiaries, the change may not be a concern.
For those with larger IRAs or few beneficiaries, the change can be very significant.
Planning to minimize the Act’s impact involves many considerations.
(a) converting part or all of an IRA to a Roth IRA;
(b) married couples disclaiming part of the account at the first death, in favor of children, who will have two 10-year distribution periods;
(c) if charitably minded, naming a charitable remainder trust as beneficiary; and
(d) naming a multi-generation see-through trust as beneficiary.
Planning around the Act, for 2020 and for the future, will be unique for each client.
First, review all IRA beneficiary designations to ensure that there is both a primary beneficiary and a secondary beneficiary.
Second, consider whether part or all of an IRA should be converted to a Roth IRA.
The Secure Act’s impact on IRA and retirement plans is complex. Contact FOS for information and guidance.