By Nancy Burner, Esq.

On January 1, 2020, as we entered another year with no idea what was on the horizon, a new federal law came into effect regarding retirement accounts.

The SECURE Act, “Setting Every Community Up for Retirement Enhancement,” affects millions of Americans who have saved through tax-deferred retirement plans, with the biggest impact being who should inherit those plans. Today, two years later, SECURE is still a new concept for many clients who don’t know the law or how it applies to their own situation.

One of the changes is that the age at which a plan holder must receive the Required Minimum Distributions (“RMD”) has been increased from 70 1⁄2 to 72. RMDs are deducted annually, based on the total account value as of December 31 of the previous year. year and the life expectancy of the plan holder. The deferral to 72 will result in an additional year and a half of tax-deferred growth on the funds.

SECURE also created a $10,000 penalty-free withdrawal for someone giving birth or adopting a child. The act also expanded the ability of small business owners to provide funding for their retirement plan. However, the most radical element of SECURE targets the beneficiary of the plan after the death of the original plan holder.

Prior to SECURE, a non-spouse designated beneficiary had the option to convert the plan to an inherited IRA and take an RMD based on their own life expectancy. The beneficiary could take more than the RMD if necessary, knowing that each distribution is taxable income.

Consider a 90-year-old man with an IRS life expectancy of 12.2 years who names a 65-year-old child as the designated beneficiary. A 65-year-old man has an IRS life expectancy of 22.9 years. This beneficiary could previously “stretch” distributions over their life expectancy and allow these funds to grow tax-free for many years. With SECURE, this section is lost for the majority of beneficiaries. SECURE prescribes a mandatory payment over 10 years for a designated beneficiary. Being forced to liquidate within 10 years will result in more income tax being paid than if the beneficiary had the 22.9 year payment.

The SECURE law has provided limited exceptions to this 10-year payment rule. These five categories of designated beneficiaries include a spouse, a minor child of the plan holder, a chronically ill person, a disabled person, or a person no more than 10 years younger than the plan holder.

If you have retirement assets, this change serves as a trigger for your plan to be reviewed by your estate planning attorney and financial advisor. This review is particularly important when an estate plan includes a trust as the beneficiary of a retirement account. The terms of the trust may need to be adjusted to change from an intermediate trust to an accumulation trust.

A flow-through trust forces all distributions to the beneficiary, while an accumulating trust allows distributions to remain protected in the trust. Other clients may choose to leave tax-deferred retirement assets to charities rather than individuals. Still others may rearrange allocations to make IRAs payable to someone at least 10 years younger than them, such as a sibling, thereby focusing on saving other types of assets for beneficiaries otherwise obligated to take a taxable payment over 10 years.

Many Americans have spent their working lives contributing to tax-deferred plans with the expectation that it would provide them with a stream of income in retirement and that it would be passed on to their beneficiaries as an income stream. Although SECURE does not change the plan for some, the impact of SECURE should be considered by all. Stay tuned for future updates as there are already rumors about SECURE 2.0 which, among other things, could increase the age at which RMDs are required.

Nancy Burner, Esq. practices elder law and estate planning from his office in East Setauket. Visit www.burnerlaw.com.