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The “Setting Every Community Up for Retirement Enhancement Act” (the SECURE Act) is part of the spending bill legislation passed by Congress, which is now awaiting the President’s signature, effective January 1, 2020.
The SECURE Act significantly changes the Required Minimum Distribution (“RMD”) requirements for inherited retirement accounts by delaying the required beginning age. However, the biggest impact will affect your loved ones -your Designated Beneficiaries – who may be precluded from the wealth transfer technique, commonly known as the “Stretch IRA”.
The following is a synopsis of four of the major changes to retirement planning upon the passage of the SECURE Act:
- Extending the Required Minimum Distribution beginning date to age 72 – Instead of a required beginning date of age 70 ½ for RMDs, the required beginning date has been increased to age 72, for those people who have not already reached age 70 ½ by December 31, 2019. So, the first RMD must occur by April 1st of the year after attaining age 72. This change will allow retirement savings to be tax-deferred for an additional one to two years lasting longer for retirement;
- Limiting the “Stretch” for post-death Required Minimum Distributions from inherited retirement accounts– Most Designated Beneficiaries will need to take distributions from an inherited retirement account within a ten (10) year period, instead of stretching the distributions over their life expectancies. This tax-generating provision will accelerate the depletion of inherited retirement accounts.
However, there are exceptions to this rule for “Eligible Designated Beneficiaries”, such as surviving spouses, minor children, individuals with disabilities or chronic illnesses, and those who are less than ten (10) years younger than the deceased retirement account holder. Trusts for individuals with disabilities may qualify for the life expectancy method under the SECURE Act;
- Repealing the age limit for Traditional IRA contributions – People working past age 70 ½ are now allowed to continue contributing to Traditional IRAs, as is permitted with 401(k) plans and Roth IRAs; and
- Expanding access to annuities in retirement accounts – In-plan annuities inside of a 401(k) plan are permitted which will allow more sources of retirement income.
Strategies and Opportunities
As part of retirement planning, it is important to analyze the projected RMDs and understand when to start and the best way to take the RMD in order to minimize income taxes. For example, Qualified Charitable Contributions from an IRA directly to a charity will satisfy the RMD requirement while avoiding income tax. Roth IRA conversions is another strategy that can be implemented to move taxable IRA funds into Roth IRAs which are not subject to RMDs at age 72, providing more control over income. Proper retirement and estate planning are critical due to the accelerated distributions of inherited retirement accounts under the SECURE Act.
For individuals with disabilities or chronic illnesses, this is an opportunity to have inherited IRAs paid out to a Supplemental Needs Trust; thus, allowing the individual to maintain government benefits and stretch the IRA over the individual’s lifetime.
Russo Law Group, P.C., is analyzing the Secure Act to understand its impact on retirement planning for our clients. It is important to consult with and retain experienced professionals. Russo Law Group, P.C., has knowledgeable attorneys who can provide retirement and estate planning legal services and advice.
For more information about this ALERT, or to review or update your retirement and estate plan, we invite you to contact us at (800) 680-1717, and to visit our comprehensive website at www.vjrussolaw.com.