The Setting Every Community Up for Retirement Enhancement (SECURE) Act changes the law surrounding retirement plans in several important ways:
• Stretch IRAS. The biggest change eliminates “stretch” IRAs. Under the previous law, if you named anyone other than a spouse as the beneficiary of your IRA, 401(k) or other tax-favored retirement plan, the beneficiary could choose to take distributions over his or her lifetime and to pass what is left on to future generations (called the “stretch” option). The SECURE Act requires nonspouse beneficiaries of an IRA to withdraw all money in an IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals would take place during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision applies to those who inherit IRAs as of Jan. 1, 2020.
• Required minimum distributions. Previously, people had to begin taking distributions from IRAs at age 70 1/2. Under the new law, individuals who were not 70 1/2 at the end of 2019 can now wait until age 72 to begin taking distributions.
• Contributions. The new law allows workers to continue to contribute to an IRA after age 70 1/2, which is the same as rules for 401(k)s and Roth IRAs.
• Employers. The tax credit businesses get for starting a retirement plan is increased and the new law makes it easier for small businesses to join multiple-employer plans.
• Annuities. The SECURE Act removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.
• Withdrawals. The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances.
To evaluate whether updates are needed to your estate plan in light of this new legislation, contact your estate planning attorney today.