How the Secure Act can affect your Estate Plan

Legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed as part of the government’s spending bill last year and took effect on January 1, 2020. This intent of this legislation is to strengthen retirement security for many individuals. However, required distribution rules have changed mostly for the worse for individuals.  Although the changes may not affect your current situation, they likely will affect your estate plan later on and will affect how you inherit assets.

Key provisions in the SECURE Act that could affect your estate plan include:

  • Required Minimum Distributions Delayed – The age by which individuals were required to begin Required Minimum Distributions (RMDs) has been increased from 70 ½ to 72. This change only applies to individuals who turn 70 ½ in 2020 or later.  This change could make a Roth IRA conversion more advantageous for those under age 72.
  • Eliminates “Stretch” IRA Payout – Prior to the SECURE Act, individual beneficiaries were allowed to “stretch” post-death distributions based on the life expectancy of the beneficiary. Now these beneficiaries must take the full value of the account within a 10-year payout period. However, you are not required to take a distribution every year but the entire account must be distributed by the end of the 10th year following the death of the account owner. Exceptions exist for spouses, minors, those not more than 10 years younger, and the disabled. IRAs inherited prior to 2020 are grandfathered under the prior stretch-out rules.  Therefore, if you have named a Trust as a beneficiary, you should determine whether your current plan still makes sense for your situation.  The beneficiary (whether a Trust or an individual) would consider spreading out the distributions over all 10 years to reduce taxes. Accelerate distributions in any low tax bracket years.
  • Traditional IRA Contributions at Any Age – Prior to the SECURE Act, there was an age limit of 70½. Now eligible taxpayers of any age can make traditional IRA contributions.
  • Retirement Account Changes -The SECURE Act establishes multiple employer plans (MEPs) so that employers of all sizes can merge together to create “open” MEPS or pooled plans. This was done to lower employer administration costs.  In addition, more employers will now be allowed to include annuities as an investment choice in their retirement plans, as the fiduciary (or legal) responsibility for these annuities has shifted from the employer to the insurance company providing the product.
  • 10% Early Distribution Penalty Exception – This exception would allow for a penalty-free distribution of up to $5,000 from an IRA or employer plan for a “Qualified Birth or Adoption Distribution.” To qualify for this exception, the account owner must take the distribution within one year of the date of birth or the date of adoption. You are also allowed to repay this distribution to the plan or IRA at a later date.
  • Student Loan Repayment from 529 Plans – Distributions can now be made tax-free from 529 Plans to pay down student loans – called “Qualified Education Loan Repayments”, limited to a lifetime amount of $10,000.

If you believe that these changes affect your estate plan or have any questions regarding this legislation please call Herr, Potts and Potts at (610)254-0114 to speak to our estate planning attorneys for more information about estate planning in Pennsylvania.