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3/3/2020 | Articles & Alerts

By Devin S. Fox

On January 1, 2020, a sweeping tax reform, known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE” Act) went into effect. This law, enacted at the end of last year with overwhelming bipartisan support, impacts virtually anyone who has established an IRA or other form of retirement plan. It has been hailed for provisions allowing for contributions to IRAs and commencement of required minimum distributions (RMDs) at later ages, yet these attributes will certainly be outweighed by the accelerated tax obligations which will be imposed upon the heirs of these accounts.

The purpose of this alert is to detail the major provisions of this new law and how they may impact your planning.

The Law

The SECURE Act, which is part of a broad appropriations bill for fiscal year 2020, makes substantial changes to the laws governing retirement accounts. Below is a look at some of the more important changes under the SECURE Act, which affect most individuals, specifically their ability to manage taxes and grow and protect their retirement accounts for themselves and their heirs.

  1. Partial elimination of stretch IRAs for most beneficiaries. Prior to the SECURE Act, most beneficiaries (spousal and nonspousal) who inherited retirement accounts from a plan participant or account owner were generally allowed to stretch the tax-deferral advantages of the inherited account by taking distributions over the beneficiary’s life expectancy. This “stretch” treatment is no longer available for a beneficiary who inherits an account from a decedent whose death occurs on or after January 1, 2020, unless the beneficiary is (i) the decedent’s surviving spouse, (ii) a minor child of the decedent (but not a stepchild, grandchild or more remote descendant and only until the child attains majority), (iii) a disabled or chronically ill person, or (iv) a person not more than 10 years younger than the decedent. Unless the beneficiary falls into one of these categories, the beneficiary must now withdraw the entire balance of the inherited account within 10 years from the decedent’s death (or, in the case of a minor child, from the date the beneficiary attains majority).  

    In light of these changes, you should review your beneficiary designations for your retirement accounts. If you have designated a trust as a beneficiary of your retirement account, you should review the terms of the trust as well. Depending on the trust terms and whether the trust beneficiary falls into one of the exception categories listed above, an account which you expected would be paid to a trust and distributed out to the beneficiary over his or her lifetime might be fully distributed to the beneficiary within 10 years under the new rules. The trustee may not have discretion to withhold these distributions even if doing so would be in the best interests of the beneficiary.

    There are several strategies you may now wish to consider implementing to offset the income tax consequences of the accelerated distributions including Roth conversions, incorporating life insurance to replace the tax-deferred retirement plan growth, and designating multiple beneficiaries (preferably those in lower tax brackets) or a charitable remainder trust as beneficiary. 

  2. Repeal of the maximum age for traditional IRA contributions. Individuals may now contribute to a traditional IRA after attaining age 70½ as long as he or she receives compensation, which generally means earned income from wages or self-employment.
  3. Required minimum distribution age raised from 70½ to 72.Individuals who reach age 70½ in or after the year 2020 will not be required to begin taking required minimum distributions from an IRA until age 72.
  4. Penalty-free retirement plan withdrawals from IRAs and qualified plans permitted for expenses related to birth or adoption of a child. With certain exceptions, there is a 10% penalty on distributions from qualified plans and IRAs to a plan participant or account owner before attaining age 59½. Starting in 2020, plan distributions up to $5,000 that are used to pay for certain expenses related to the birth or adoption of a child are not subject to the 10% early withdrawal penalty if taken within 1 year from the child’s birth or the date the adoption is finalized. This amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000.  

How It Impacts You

Virtually everyone who owns an IRA or other form of retirement plan is impacted by this law. At the very least, it is imperative that you review the beneficiary designations under these accounts and the terms of the trust if one is designated as the beneficiary. If the beneficiary is a trust, you should ascertain whether the provisions of the trust minimize the exposure to income taxes that will be due under the new law and whether utilizing a trust to manage a beneficiary’s inheritance of this asset is no longer the most prudent option to accomplish your estate planning objectives.

In short, estate plans that were properly established prior to the new law may be in need of revision to ensure that income taxes are minimized upon your death. If you would like to schedule a time to discuss these changes in greater detail or review your plan to determine how these changes may affect you, please feel free to contact us.

Maury B. Reiter, Managing Principal, 610-260-6000

Thomas D. Begley, III, Principal, 856-675-1550

Devin S. Fox, Associate, 610-260-6000