What You Need to Know About the SECURE Act of 2020
In 2019, Congress passed a bipartisan appropriations bill. As part of this massive spending bill, there is a piece of legislation known as the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act represent the first significant change in retirement legislation since the Pension Protection Act in 2006. On December 20, 2019, the President signed the Act into law, and it came into effect on January 1, 2020.
The impact of the SECURE Act to some retirees, near-retirees, and their future beneficiaries is profound, and it is imperative to schedule a review of your retirement, estate, and trust plans. Failure to act on the changes brought forward by the SECURE Act can create substantial tax burdens for some beneficiaries and even the possibility that they become locked out of their inheritance for a decade.
The SECURE Act of 2020: What’s Changed
One of the most important provisions of the SECURE Act to understand is the removal of the stretch IRA required minimum distribution (stretch RMD). In essence, the removal will act as a tax revenue generator. This change means many Americans will face a tax increase as non-spouse beneficiaries must spread withdrawals over a maximum of ten years and not the lifetime of the account holder. The removal of the RMD for stretch IRAs is going to create significant problems for certain types of trusts, like the “see-through trust,” that were written before the SECURE Act. Previously, a see-through trust allowed an individual, upon their death, to pass retirement assets of their IRAs via a trust to a chosen beneficiary. If the trust is not updated to match the current SECURE Act language, there could be restrictions in accessing funds to the heirs, which may cause massive tax liabilities down the line.
Annuities are also affected by the SECURE Act, as the legislation will ease restrictions to include them in consumers’ 401(k)s. While this is a positive for lifetime income, the bill also lessens and even removes some of the fiduciary requirements to vet insurance companies and their financial products before allowing them into your 401(k) plan. This change, coupled with a reduction in overall standards the SEC imposed earlier this year, creates an increased likelihood that consumers could experience negative consequences from poorly designed financial products and the possibility of insurance company failure.
8 Significant Ways the SECURE Act Will Impact Your Retirement Plans
According to Forbes, there are eight significant ways the SECURE Act will impact your retirement plans. They include:
- An increase in ability for small employer access to retirement plans
- An increase in annuity options inside of retirement plans
- An increase in required minimum distribution (RMD) ages
- Removal of age limits on IRA contributions
- Tax credit to encourage automatic enrollment into retirement plans through small employers
- Penalty-free distributions for childbirth or adoption
- Lifetime income disclosure for defined contribution plans for transparency
- Removal of stretch inherited IRA provisions
It is imperative as an individual to be responsive to the changes this proposed new law will enact. Currently, estate attorneys, CPAs, and financial advisors are receiving additional training to understand the long-term tax implications of SECURE Act provisions. For those affluent retirees, Kiplinger advises there are five things you can do immediately to respond to the SECURE Act. The first is to delay your IRA distributions if possible and continue to save but perhaps not in an IRA. Also, consider paying taxes BEFORE your children inherit your IRA. Talk to your financial planner, tax advisor, and revisit your existing estate planning documents to make sure the plans don’t compromise any existing IRAs that will be passed on to your beneficiaries.
Contact an Experienced Estate Planning Attorney ASAP.
The overall implications of the SECURE Act to your retirement and your estate plan are numerous. Give Andre O. McDonald, a knowledgeable Howard County, Montgomery County and District of Columbia special-needs planning, veterans pension planning, Medicaid planning, and estate planning attorney a call at, (443) 741-1088 or (301) 941-7809 to discuss how we can help make sure your retirement assets pass with as few tax consequences as possible.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL OR TAX ADVICE.
