How the SECURE Act Can Affect Your Retirement Account Distributions

The federal SECURE Act (Setting Every Community Up for Retirement Enhancement) has introduced significant reforms to retirement savings laws in the United States. Its provisions can profoundly affect estate planning strategies involving retirement benefits, particularly individual retirement accounts (IRAs) and other qualified retirement plans such as 401(k)s.

The following are among the key provisions of the SECURE Act that impact estate planning:

1. Elimination of the “stretch” for non-spouse beneficiaries — Under prior law, non-spouse beneficiaries of inherited IRAs or 401(k)s could “stretch” required minimum distributions (RMDs) over their lifetimes. The SECURE Act now requires most non-spouse beneficiaries to fully distribute the inherited account within 10 years of the account owner’s death. The 10-year rule can accelerate the tax burden on beneficiaries, pushing them into higher brackets during peak earning years. The rule makes exceptions for eligible designated beneficiaries, including children (until reaching age of majority), disabled or chronically ill individuals and beneficiaries less than 10 years younger than the account owner. 
2. RMD age Increased to 72 — The SECURE Act raised the age at which individuals must begin taking required minimum distributions from their retirement accounts from 70½ to 73. This change in age limit gives account owners more time to allow their retirement savings to grow tax-deferred and allows them additional flexibility in their estate planning and gifting strategies.
3. Inclusion of annuities in retirement plans — The SECURE Act allows individuals more latitude for lifetime income options, such as annuities, in employer-sponsored retirement plans, such as 401(k)s. This change may impact estate planning decisions, since annuities often have different inheritance rules and tax implications compared with traditional retirement accounts.
4. Charitable transfers — IRA owners of a certain age are eligible to transfer up to $50,000 directly to a charity as a charitable gift annuity or in a charitable remainder trust. The distribution from the IRA is excluded from the owner’s taxable income. 

In light of these changes, state planners should consider doing the following:

1. Review and update beneficiary designations — Given the 10-year distribution rule, account holders should revisit their IRA beneficiary designations. Designating a trust or a minor as a beneficiary, for example, may have unintended tax consequences.
2. Reevaluate the use of trusts — Trusts are a common estate planning tool for controlling the distribution of retirement assets, particularly for minor or disabled beneficiaries. However, under the SECURE Act, conduit trusts, which previously facilitated lifetime RMDs, may no longer serve their intended purpose due to the 10-year rule. 
3. Reassess charitable giving strategies — Individuals with charitable intentions may consider designating charities as beneficiaries of their retirement accounts. Since charities do not pay income tax, this strategy can preserve the full value of the retirement account for philanthropic purposes while leaving other, less-taxed assets to individual heirs.
4. Coordinate with an estate planning attorney — The complexities introduced by the SECURE Act should motivate a thorough review of all estate planning documents, including wills and trusts. A qualified estate planning attorney can help ensure that your estate plan aligns with the new rules while minimizing tax burdens and preserving your intended legacy.

At the Law Office of Shelly A. Merchant in Deer Park, Texas, we assist people of all ages in devising comprehensive estate plans that preserve their wealth for future distribution. Call us today at 281-817-0998 or contact us online to schedule a consultation.