In 2020, the SECURE Act (Setting Every Community Up for Retirement Act) took effect. The SECURE Act makes several big changes that affect retirement accounts such as 401 k plans, Roth IRAs, individual retirement accounts (IRA), and other specific types of savings plans. Understanding the SECURE Act is imperative to ensure that your estate plan is up to date and also to ensure that your estate planning goals are accomplished.
After you read this article, you may have questions about how the SECURE Act may impact your retirement goals as well as your estate plan. Ball Morse Lowe is here to help. Our estate planning attorneys provide free consultations and individualized solutions to meet the needs of our clients. Schedule your free consultation now!
Changes Under The SECURE Act
There are several positive changes associated with The SECURE Act for both employers and employees. Positive changes include increasing the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70 ½ to 72 years of age and eliminating the age restriction for contributions to qualified retirement accounts.
The most significant change is that the SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death, eliminating the ability to stretch RMDs over a beneficiary’s life expectancy. This was referred to as a stretch IRA. That type of IRA was highly controversial because the beneficiary generally paid more in taxes over a much shorter distribution period. This substantial change will impact most existing estate plans.
If you are a part-time worker who meets specific qualifications, your employer now has an incentive to allow you to participate in a retirement savings plan through your earned income. Beginning in 2024, The SECURE Act will allow you to begin utilizing a 401 k plan. To qualify, you must be at least 21 years old, complete at least 1,000 or more hours during the year, or complete at least 500 hours during the year for three consecutive years. However, if you are a member of a union, you are exempt from these requirements.
Previously if you wished to withdraw funds from an IRA or defined contribution plan to assist with paying for childbirth or adoption, you would be responsible for a 10% tax. Now, you can withdraw up to $5,000 per child from an IRA or defined contribution plan tax-free, without the 10% penalty. However, you must replace the funds within 12 months of the birth or adoption.
Life expectancies are increasing. It is important to consider every avenue to improve your retirement income. Another benefit of The SECURE Act is in its incentivizing of small businesses to offer 401 k retirement account annuities. Annuities can be an important part of retirement savings because of their longevity. They have the ability to provide you with a guaranteed monthly payment for the rest of your life.
Small businesses are offered several tax credit opportunities to increase the likelihood that they will offer 401 k plans, defined contribution plans, individual retirement accounts (IRAs), or another type of retirement savings opportunities for their employees. Additionally, as of January 1, 2021, two or more small businesses will be allowed to come together to offer a single retirement savings account referred to as a Multiple Employer Plan. It allows two or more businesses, regardless of whether they are in the same industry, to create a "pooled plan provider" to act as the retirement account administrator who handles the responsibilities of managing the plan. For tax credits, small businesses with 100 employees or less can receive a tax credit of 50% of their costs for starting the retirement plan. They also receive a $500 tax credit for three years if the plan automatically enrolls employees into the retirement plan.
Old Standards vs. New SECURE Act Standards
Under the old retirement account law standards, the beneficiaries of inherited retirement accounts could take distributions over their individual life expectancies. Under the new law, the account must be distributed within ten years, resulting in acceleration of income tax due and potentially causing your beneficiaries to be bumped into a higher income tax bracket, which means they will receive an amount significantly less than what was originally anticipated. This is where the term "stretch IRA" originated. Before the SECURE Act, the distributions from the inherited retirement account could be stretched out over a significant amount of time. After the new law passed, this drastic change took place and essentially gave the beneficiary roughly ten years versus their life expectancy to receive the retirement income.
There are exceptions to the ten-year withdrawal rule under the SECURE Act:
- Beneficiaries who are not more than ten years younger than the account holder;
- Account owner’s children who have not reached the “age of majority” (however, the 10-year rule does apply after the child reaches the age of majority);
- Disabled individuals; and
- Chronically ill individuals.
Why Review Your Estate Planning Goals?
The simple truth is that life changes. There are marriages, divorces, births, unexpected deaths, and unexpected illnesses. Throughout all of it, you are living your life. You are working. Maybe you are starting a business. Maybe you are working in a traditional capacity and moving up the ladder. You are acquiring assets. Maybe you buy a house. Perhaps you begin to invest. In short, you live your life. And life is about change. As your life changes, your estate planning goals also change. After all, the purpose of estate planning is about your retirement as well as taking care of your loved ones.
Proper analysis of your estate planning goals and planning for your beneficiaries’ circumstances is imperative to ensure your goals are accomplished. Your estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and losing an inheritance through a divorce. In order to protect your hard-earned retirement account and your loved ones, it is critical to act now as well as revisit your estate plan in the future when necessary.
If you have an existing estate plan, the provisions in your plan that relate to retirement accounts will likely need to be updated to reflect these recent changes in the law. This is also a good time to review your beneficiary designations on all retirement accounts and ensure these take into account any recent life changes as well as the changes in the law.
Let Ball Morse Lowe Review or Revise Your Documents
Although this new law may be changing the way we think about retirement accounts, Ball Morse Lowe is here and prepared to help you properly plan for your family and protect your hard-earned retirement accounts. If you are interested in including charities as part of your estate plan, now is a good time to review your plan and possibly use a portion of your retirement accounts to provide for charities.
If you are concerned about the inheritance available to your beneficiaries due to the tax implications of the SECURE Act, we can investigate different strategies with your financial and tax advisors to ensure that your beneficiaries’ receive what you intended. Give us a call today to schedule your free consultation now to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act.