The Setting Ever Community Up for Retirement (Secure) Act became effective January 1, 2020. The Act makes a number of changes to retirement plan laws, and among these are changes to the required minimum distribution (RMD) rules for inherited individual retirement accounts (and also other qualified retirement accounts). A spouse is still able to roll over the participant’s (decedent’s) plan into his or her own plan, take RMDs over his or her life expectancy, and designate his or her own beneficiaries.
Prior to 2020, if a participant had a “designated beneficiary” on his or her IRA, then the beneficiary could take out RMDs over that beneficiary’s life expectancy, which could allow for significant income tax deferral. The term for this is typically called “stretch IRAs”. Certain kinds of qualifying trusts, called “see-through” trusts, were considered designated beneficiaries. In the absence of a designated beneficiary, the account must be distributed and income taxes paid within 5 years of the participant’s death if he or she dies prior to reaching age 72, and if after age 72, over the remaining life expectancy of the participant.
Under the Secure Act, a designated beneficiary must take out a participant’s account (and pay the income taxes) within 10 years. The distributions can take place in any manner that the beneficiary chooses over that 5 or 10 year period, including a lump sum on the last day.
There are some exceptions to the new rule, called “eligible designated beneficiaries”, who can continue to stretch out distributions. Eligible designated beneficiaries are:
- Surviving spouse
- Disabled individuals
- Chronically ill individuals
- Individuals less than 10 years younger than the account participant
- Minor children of the participant (but only until they reach majority at which point the 10 year rule applies)
Because of the elimination of the stretch IRA opportunity, many estate plans should be reviewed and possibly updated, particularly for clients who have designated trusts as beneficiaries of IRAs. Some clients may want to consider more charitable giving with IRAs or Roth conversions. Some clients may not want to designate trusts as beneficiaries of IRAs given the loss of the stretch option. Further and importantly, many see-through trusts may no longer function as intended and may not qualify for the 10 year payout.
Consult with your attorney and other professional advisors to determine if you need to make changes to your estate planning to address the new Act.