Surprise…Congress did something major at the very end of last year that impacts retirement accounts – investment options, required distributions for certain classes of beneficiaries.
You may have heard that the federal appropriations bill enacted into law by Congress and the President in the final weeks of 2019 includes changes to the federal tax code that may affect your qualified retirement plan (such as a 401(k)) or IRA (“retirement assets”).
Those changes may affect you during your lifetime, but may also affect the way in which those retirement assets may be distributed to your beneficiaries after your death. Significantly, the SECURE Act may impact the timing and amount of tax paid by those beneficiaries on distributions of the retirement assets, as well as your ability to protect the retirement assets from the beneficiaries’ creditors (to a lesser extent), and ultimately may affect the value of those retirement assets in the hands of the beneficiaries.
This blog post summarizes some of the key aspects of the SECURE Act that may affect you or your Personal or Family Contingency Plan. I hope you find it helpful in understanding the major changes enacted by this legislation, and how they might affect you. It’s longer than usual…bear with me.
CHANGES TO DISTRIBUTIONS (TAKING MONEY OUT)
Changes to Distributions to Contingent Beneficiaries
Generally, a contingent beneficiary may claim retirement assets if the primary beneficiary is deceased or disclaims them (that’s a topic for a future blog post). This usually looks like this:
• Primary Beneficiary = My Spouse;
• Contingent Beneficiary = My Kids, or My Nieces/Nephews, or My Siblings, or My Friends, or a trust for the benefit of any of the aforementioned persons, etc.
Old Law: It was possible to stretch the distribution of inherited qualified plan or IRA assets over the life expectancy of a beneficiary if that beneficiary met the requirements of a “designated beneficiary” under the law. This lifetime stretch-out offered potential advantages in terms of income tax-free growth of the retirement assets during the beneficiary’s life and the cumulative amount of income tax paid on distributions from the retirement account. The law also permitted these advantages for retirement assets left in trust, as long as the trust was structured to meet certain requirements.
SECURE Act: Now most non-spousal designated beneficiaries will be required to receive the full amount of an inherited qualified plan or IRA within 10 years of the death of the person who funded the plan or IRA. The “life expectancy” rules still apply until a minor child turns 18, after which, the remaining balances must then be fully distributed within 10 years after reaching the legal age of adulthood (18 years old in Massachusetts).
No change for the following “eligible designated beneficiaries” – still permitted to take distributions over their expected lifetimes:
• A surviving spouse;
• Beneficiaries who are disabled or chronically ill;
• Beneficiaries who are less than 10 years younger than the participant (e.g. sibling); and
• Minor children (those under 18 years old).
What Does This Mean For Me
The good news is that the SECURE Act does not change the method of designating a beneficiary or beneficiaries to receive inherited retirement assets. If you have existing beneficiary designations in place, those designations are still valid.
What the SECURE Act does, however, is introduce a host of new considerations to take into account in structuring a Personal or Family Contingency Plan to maximize the benefit of the retirement assets and best protect your beneficiaries.
The selection and structure of designating a non-eligible designated beneficiary has a financial impact, generally, income tax changes for non-eligible designated beneficiaries (including trusts). It is best to make these decisions in coordination with your estate planning attorney, financial advisor, and CPA.
Other Changes – Change in Required Minimum Distribution Age
Change in the age at which a person must begin taking distributions from a qualified plan or IRA.
Old Law: Most people (with the exception of some who are not yet retired) were required to begin taking distributions from their qualified plans or traditional (non-Roth) IRAs by April 1 of the year following the one in which they reached age 70 ½.
SECURE Act: The age is increased to 72 for those who were not yet required to take distributions under the old law.
Changes in Funding of Retirement Accounts
In addition, the SECURE Act makes a number of changes to funding your retirement accounts, ages, types of permissible investments, etc.
Your accountant or financial advisor is likely in the best position to advise you as to whether and how you might benefit from these changes in the law. I encourage you to reach out to them to discuss your retirement strategy in light of the SECURE Act.
Of course, you are welcome to contact me as well, and I will be glad to assist you in understanding how the SECURE Act applies to your circumstances, in coordination with your other trusted financial professionals, as appropriate.
Note: The contents of this blog post are for informational purposes only, and are not intended to constitute legal advice or form an attorney-client relationship. For information and advice particular to your situation, please contact our office at 857/277-0918 and arrange a meeting with an attorney.