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The SECURE Act brings changes to retirement account rules

Whether you’ve been retired for two decades or are carefully planning for retirement in the future, chances are your retirement will look different from the generations before you. Your parents may have relied on cash rent from the farm as a source of income in their golden years. Or perhaps your father had a pension from the company he worked for his whole career. These days, more and more people rely on company 401Ks and IRAs (individual retirement accounts) to fund their retirements.

On January 1, 2020, a new federal law called the SECURE Act (Setting Every Community up for Retirement Enhancement) took effect changing several of the fundamental rules for retirement accounts. This article will discuss the changes that most directly impact the estate planning world.

Owners of Traditional IRAs are required to take required minimum distributions from their IRAs beginning at a certain age. The SECURE Act increased that age from 70.5 to 72. Visit with your financial advisor to discuss whether this impacts you if you are unsure. Additionally, the SECURE Act removes the previous contribution age limit of 70.5 and allows you to contribute to an IRA as long as you are still working. These changes are universally viewed as taxpayer-friendly updates.

The SECURE Act has made big waves in the estate planning world, however, by largely removing the taxpayer-friendly stretch rules for inherited IRAs going to non-spouse beneficiaries. Prior to the SECURE Act, most beneficiaries of inherited IRAs could stretch out the withdrawals over their life expectancy. Now, most non-spouse beneficiaries of an inherited IRA must withdraw the entire balance of the IRA within 10 years. In addition to the surviving spouse, exceptions to this rule also exist for minor children, beneficiaries who are disabled or chronically ill, and beneficiaries who are within ten years of age of the original IRA owner.

Getting rid of stretch-IRAs for non-spouse beneficiaries was not a taxpayer-friendly update because these types of inherited IRA beneficiaries will have to drain these accounts within just ten years instead of over their life expectancies. This will likely result in a higher percentage of the inherited IRA being subject to income tax as it will push the non-spouse beneficiary into a higher tax bracket since they are forced to take larger distributions than previously required in order to completely distribute the inherited IRA within the ten year limit.

Additionally, if you named a trust as the primary or secondary beneficiary of your IRA, your attorney can recommend updates to the language in that trust to coincide with these new rules so the beneficiary of the trust is not stuck with a higher than necessary tax bill after your passing.

As with any new law, the SECURE Act has many rules, caveats, exceptions to the rule and exceptions to the exception. Check with your legal, financial and tax advisors to see if updates to your planning are necessary because of these changes.

This article does not constitute legal advice. Each individual should consult his or her own attorney.

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