The SECURE Act was included in the bipartisan spending bill that was signed int law by President Trump on December 20, 2019. The SECURE Act is generally effective for a death occurring on or after January 1, 2020. For any death occurring
before December 31, 2019, the old law will apply.
The SECURE Act extends the age for required minimum distributions from retirement accounts from age 70 ½ to age 72 and removes age restrictions on IRA contributions. The biggest change, however, is the elimination of the “stretch” IRA for most non-spousal beneficiaries. It will be important to review all beneficiary designations on retirement accounts after the SECURE Act to make sure the impact of the law is considered and modifications to the beneficiary structure is made as appropriate.
The SECURE Act did not change the treasury regulations applicable to retirement accounts, but did attempt to replace the life expectancy payout method with a ten (10) year distribution rule except in special circumstances. Before 2020, a designated beneficiary could elect to “stretch” the IRA distributions over his or her lifetime. The effect of the “stretch” IRA would be to minimize the taxable distribution amounts from the IRA and extend the tax-deferred benefits of the IRA potentially over many years. The beneficiary on the IRA may still be effective as structured before 2020, but the SECURE Act may alter the result of naming that beneficiary if the beneficiary is required to take full distribution of the account within the ten (10) year payout period under the new law.
Under the SECURE Act, there appear to be three (3) categories of beneficiary - (i) no designated beneficiary, (ii) a designated beneficiary, and (iii) an eligible designated beneficiary (which is a new designation under the SECURE Act).
No Designated Beneficiary- If there is no designated beneficiary (which includes naming the “estate” as the beneficiary or the “estate” receiving the account as a default) the full distribution of the retirement account must occur within five (5) years of death. This was the result under prior law.
Designated Beneficiary - This is an individual or see through trust that does not qualify as an “eligible designated beneficiary.” For any designated beneficiary, the distribution must occur within ten (10) years of death. The SECURE Act does not require any regular or periodic annual distributions over the ten (10) year period, but the full account must be distributed by December 31 in the tenth year following death.
Eligible Designated Beneficiary- There are five (5) classes of an eligible designated beneficiary, which are (1) the surviving spouse (or qualified conduit trust), (2) a minor child (only to the age of majority can life expectancy be used - once the child attains the age of “majority” the account then is subject to the ten (10) year distribution rule), (3) disabled beneficiary, (4) chronically ill beneficiary, or (5) a beneficiary who is not more than ten (10) years younger than the deceased participant (such as a beneficiary who is the same age or older than participant). For any eligible designated beneficiary, the beneficiary may elect to utilize the life expectancy payout for the account. The SECURE Act did not define what constitutes a minor child or when a child “attains majority.” It is possible that “majority” may be extended if the child is younger than age twenty-six (26) and an education course is in progress.
Based upon the significant changes that occurred as a result of the SECURE Act regarding elimination of the “stretch” IRA, it would be prudent to review the beneficiary structure on all retirement account assets to understand the options and implications of the beneficiary structure. This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes. Consult with your legal or tax advisors before implementing any suggestion contained herein.