The retirement system has been troubled for some time. With the move away from pension programs, only about half of people participate in a workplace retirement plan. Most have to supplement their personal savings with social security. According to Vanguard’s 2019 How America Saves Report, the median 401(k) account balance among pre-retirees ages 55 to 64 is $61,700. For those ages 45 to 54, it’s $40,200. Americans are falling frighteningly short with their retirement savings.
In an effort to close loopholes and help more Americans save, Congress signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law last December. Many are still getting acquainted with the new rules that are in effect as of January 1.
One major change concerns defined contribution plans such as IRAs and 401(k)s in regard to payments to non-spouse beneficiaries. Traditionally, a non-spouse IRA beneficiary could “stretch” required minimum distribution payments of the inherited account over his/her lifetime. This could potentially allow the funds to grow tax-free for decades or keep income tax paid on the account very low. However, this rule had been eliminated.
Under the new rules, non-spouse beneficiaries must draw the inherited account to $0 within 10 years. However, the beneficiaries are not required to take Required Minimum Distributions (RMD). So, it is possible to leave the account alone for 9 ½ years and draw to zero all at once. No matter how a beneficiary handles the account, the beneficiary will pay more in income taxes. In fact, Congress estimates that the additional income tax generated from this program will raise $15.7 billion over 10 years.
Still, things could get complicated if you’re inheriting an IRA through a “conduit” or “pass through” trust which dictates that the beneficiary at a minimum must receive the required minimum distribution every year. Since the Secure Act doesn’t require minimum distributions for inherited IRAs, beneficiaries need to make sure to plan to withdraw the money within ten years. It is recommended that your trust should be reevaluated by a legal professional in light of this new Act.
However, there are interesting exceptions to this SECURE Act. Spouses are exempt, as well as disabled individuals and those who are not more than 10 years younger than the account owner. Also, if the beneficiaries of the accounts are minor children, they will receive a special exception until they reach the age of the majority.
These changes will only apply to beneficiaries of someone who dies after the end of 2019, so if you previously inherited a stretch IRA you may still operate under the former rules.
Having important legal documents in place is critical for ensuring a smooth retirement plan for you and your beneficiaries. Contact me today to set up a time to chat and make sure all your affairs are in order in light of these changes.
