Changes to Retirement Account Planning Under the SECURE Act

By Abbie R. Pappas, Esq. and Edmund G. Kauntz, Esq.

On December 20, 2019, the President signed into law the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act. The SECURE Act includes several significant changes to the laws governing qualified retirement accounts (such as IRA and 401k accounts), including the following:

  • Changes to Distribution and Contribution Ages. Under the new law, the age at which taxpayers are required to begin taking distributions from their retirement accounts has been increased from age 70 ½ to age 72. This applies only to taxpayers reaching age 70 ½ after December 31, 2019. Furthermore, the Act eliminates the rule which previously disallowed traditional IRA contributions by taxpayers older than age 70 ½, so that traditional IRA contributions may now be made by a taxpayer at any age as long as they continue to receive earned income.
  • Elimination of Stretch IRAs. Under prior law, a beneficiary inheriting an IRA or other retirement account was allowed, if certain requirements were met, to stretch out distributions from that account over such beneficiary’s lifetime. Many taxpayers chose to maximize this benefit by naming qualified trusts as the beneficiaries of their IRA or 401(k) accounts and thereby stretching out distributions to the trust over the lifetime of the trust beneficiary.

The SECURE Act eliminates these “stretch IRAs”, now requiring that such inherited accounts be fully distributed to the designated beneficiary within ten years of the plan participant’s death. There are certain exceptions, however, for certain beneficiary family members, such as surviving spouses, minor children, or disabled children. This applies to employees or IRA owners passing away after December 31, 2019.

In light of this change, clients should assess with an attorney whether it still makes sense to name their trusts as the beneficiaries of their retirement accounts, or whether alternative beneficiary designations should be considered.

  • Provisions Relevant to Younger Taxpayers. Even taxpayers who are far from age 72 should be aware of certain SECURE Act provisions which benefit younger taxpayers and families. These include:
    • A provision allowing for a $5,000 penalty-free withdrawal from a qualified retirement account in the first year after the birth or adoption of a taxpayer’s child.
    • A provision requiring employers to allow long-term part-time workers (specifically, those working at least 500 hours/year for three consecutive years) to participate in retirement plans, rather than just those employees working more than 1,000 hours/year.
    • A provision expanding the use of 529 plan funds, including to pay off a portion of the plan beneficiary’s student loans and to pay for registered apprenticeships.
    • A provision repealing the 2017 changes to the “kiddie tax”.

Furthermore, the SECURE Act contains several other elements that are potentially relevant for our clients, such as provisions favorable to small businesses participating in retirement plans and other employers.

IRS also recently updated the uniform tables which are used to calculate required minimum distributions (“RMDs”) from 401(k) plans and IRAs starting in 2021. The effect of this change is to reduce the amount of your RMDs.

If you would like to discuss the impact of the new SECURE Act provisions on your retirement accounts and your expected beneficiaries, or if you would like your estate plan reviewed in light of these new laws, please contact Abbie R. Pappas or Edmund G. Kauntz, or one of our other tax and estate planning attorneys: William M. Mills, Jean M. Cullen, or Laura Pizmoht.