Late last year, President Trump signed a spending bill into law that makes major changes to retirement plans. The new law is designed to provide more incentives to save for retirement, but it may require workers to rethink some of their planning.
Some of the biggest changes, discussed in more detail below, deal with the amount of time someone other than a spouse has to draw down all the benefits following the death of the account owner (the “stretch” period) and the age when the account owner has to start taking distributions from the account (increased to age 72 from 70 ½). A worker can contribute to an IRA even after reaching age 70 ½, and the new law allows for penalty-free (though not tax-free) withdrawals from retirement savings to offset some costs of having or adopting a child. Small businesses will also see changes in the way retirement plans are set up from this new law.
The legislation, known as the “Setting Every Community Up for Retirement Enhancement (SECURE) Act” changes the law surrounding retirement plans in several ways:
- Stretch IRAS. The biggest change eliminates “stretch” IRAs. Under current law, if you name anyone other than a spouse as the beneficiary of your IRA, the beneficiary can choose to take distributions over his or her lifetime and to pass what is left onto future generations (called the “stretch” option). The required minimum distributions are calculated based on the beneficiary’s life expectancy. This allows the money to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his or her own beneficiaries. The SECURE Act requires beneficiaries of an IRA to withdraw all the money in the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals would take place during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision will apply to those who inherit IRAs starting on January 1, 2020.
- Required minimum distributions. Under prior law, you had to begin taking distributions from your IRAs beginning when you reach age 70 ½. Under the new law, individuals who are not 70 ½ at the end of 2019 can now wait until age 72 to begin taking distributions.
- The new law allows workers to continue to contribute to an IRA after age 70 ½, which is the same as rules for 401(k)s and Roth IRAs.
- The tax credit businesses get for starting a retirement plan is increased and the new law makes it easier for small businesses to join multiple-employer plans.
- The newly enacted legislation removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.
- The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances.
Given these changes, workers need to immediately reevaluate their estate plans. Some people have used stretch IRAs as an estate planning tool to pass assets to their children and grandchildren. One way of doing this has been to name a trust as the IRA’s beneficiary, and these trusts may have to be reformed to conform to the new rules. If a stretch IRA is part of your estate plan, consult with your attorney to determine if you need to make changes.
If you would like more information on the SECURE Act and ways to plan for these changes in the law, you can call our office at 225-744-0027 and register for informational semainars being held on February 18th and 20th.
The information provided is not intended to be legal advice and does not constitute any attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation.
Ms. Melancon is an attorney with Legacy Estate & Elder Law of Louisiana, LLC with offices in Baton Rouge and Lake Charles, LA. The primary focus of her practice is estate planning, probate, special needs planning, and elder law. For more information or to attend an upcoming estate planning seminar, call her office at (225) 744-0027.