SECURE Act Could Bring Big Changes for Retirement Accounts

The SECURE Act, which recently passed with nearly unanimous support in the House, is now stalled in the Senate. Reportedly, there are a couple senators withholding support at this time. The Senate was hoping to pass the bill with unanimous support. If it passes, this bill will have a big impact on retirement accounts and savers in this country - including how retirement accounts impact your estate plan!

Among other sweeping provisions in the proposed legislation, one of the key components is changing required distributions under IRAs, 401ks, and other retirement plans. Under current law, required minimum distributions (RMDs) for traditional retirement accounts must begin no later than age 70 1/2. Distributions are based on the beneficiary's life expectancy on the beginning date. Many savers choose to wait until the required beginning date to allow their account to grow tax-deferred as much as possible. The SECURE Act would increase the required beginning date to age 72. This is a good thing for anyone wanting to get a little more benefit from their retirement account.

The SECURE Act will also change who can contribute to retirement accounts. Under current law, you can't contribute to an IRA after age 70 1/2. The proposed legislation would allow people of any age who have earned income to contribute to a traditional IRA. Both the later required beginning date and the ability to contribute at any age is great for people who continue working into their seventies and later.

Now here's the catch - your children are going to pay the tax. Under current law, non-spouse beneficiaries (aka children) of retirement accounts and IRAs are allowed to continue the tax benefits of the retirement account by "stretching" them over their own lifetimes. The distributions to the beneficiaries are taxable, but the account can continue to grow tax free in the meantime and the distribution amounts are usually lower (keeping the income in a lower tax bracket potentially as well). This is a great benefit for non-spouse beneficiaries and one we often incorporate into estate plans. However, under the SECURE Act, the non-spouse beneficiaries must withdraw the entire account within 10 years of your death (including Roth IRA accounts). Once that money is withdrawn, it all goes to the beneficiary, and they can do with it whatever they want. Any reinvestment will no longer be tax deferred.

This is a significant change in how inherited retirement accounts are treated if this law passes. Many times, people assume that children will continue the retirement account and be tax-smart. In situations where we are not so confident the children will allow the account to grow, we may look at establishing an IRA Trust or a "conduit trust" as the beneficiary of a retirement account instead, which allows the stretch out to occur when structured properly but gives the trustee more control over the distribution of assets to the beneficiary. If this proposed legislation becomes law, many families will want to consider the impact of distributing the account to their children over 10 years. In many cases, this may not be in line with the intent for leaving the account to the beneficiary. As an alternative, more people may choose to use the IRA Trust as a way to defer the inheritance even if they can't defer the tax.

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