Over two years ago, Congress enacted the SECURE Act, which provided the greatest insecurity to families. The main portion of the Act ended the ability to stretch out tax consequences over the child’s life expectancy and now a person must pay the taxes in ten years (there are exceptions—please see below). In my practice, the biggest thing I see is that most clients and their advisors are more open to talking about liquidating a portion or some of the retirement account intentionally. It has certainly opened up a conversation that was not there before the SECURE Act.
The Setting Every Community Up for Retirement Enhancement Act is more commonly and better known as the SECURE Act. People need to understand and get a good idea of the changes that have occurred effective January 1st, 2020. I will address the changes that affect estate planning and elder law the most, but there are many more fine details of this act that should be reviewed.
1. Required minimum distributions, also known as RMDs, will now start at age 72, and not age 70 and a half. Starting January 1st, 2020, retirement accounts or qualified accounts such as IRAs, 401(k)s, 403(b)s, and 457s will require a person to start taking the distributions at age 72. Previously, the age was 70 and a half, but Congress has provided an additional year and a half before you have to begin taking the required minimum distributions. For people who had not yet attained the age of 70 and a half before January 1st, this is an additional amount of time until you are forced to start taking the distributions.
Furthermore, a person can now continue to contribute to traditional IRAs after the age of 70 and a half. Previously, a person had to stop contributing, but now will be able to contribute even in the year that they turn 70 and a half and beyond, provided they have earned income.
The change that is providing the most interesting challenge to estate planning attorneys is the fact that inherited retirement accounts will no longer be able to be stretched out over the life expectancy of the beneficiaries. Under the new law, upon the death of the account owner, distributions to non-spouse individuals must be made within 10 years of the date of death.
There are exceptions to this rule for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner. There is also a minor child exception but only until they reach the age of majority and then they fall under the same 10-year rule. This change in the law will force distributions out much more quickly than they previously were, which can create a substantial amount of income tax consequences to family members and possible loss of asset protection. However, if the accounts were inherited before January 1st, 2020, they do still abide by the previous rules and can be stretched out over the person’s life expectancy.
People who had their estate planning documents drafted before the SECURE Act need to consult with their attorneys. It is an incredible time to talk to your estate planning attorneys and financial professionals to discuss if any changes need to be made. In the meantime, talk to your family members about this change so that they understand the consequences of this new Act and what it means to have to pay the tax consequences within 10 years as opposed to over the life expectancy. There are plenty of opportunities under the new Act. Consult your professional to discuss these options.
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