The SECURE Act, signed into law on December 20, 2019, makes significant changes that will affect the beneficiaries of retirement accounts. These changes will also require many individuals to review their current estate plans.
Major Changes for Beneficiaries
Retirement accounts of decedents who died on or before December 31, 2019 will follow the old rules, meaning that payout periods will remain the same. Under the SECURE Act, retirement accounts of decedents who die after December 31, 2019 will be subject to the new rules described below, which affects traditional and Roth IRA accounts.
No Change to Spouse Beneficiaries
The SECURE Act does not change the payout rules for spouse beneficiaries or the rules for spousal IRA rollovers.
Elimination of the “Stretch” Payouts for Non-Spouse Beneficiaries
Except for a few beneficiaries, a non-spouse beneficiary, regardless of age, is required to withdraw an inherited retirement account within 10 years.
Eligible Designated Beneficiaries (EBD) that are Exempt from the New 10-Year Rule
Beneficiaries who are exempt from the new 10-year payout rule are “eligible designated beneficiaries” and payout to them can be made based on their life expectancy. At the death of the eligible designated beneficiary, the EBD’s beneficiaries will be subject to the 10-year payout rule.
- Surviving spouse of account owner
- Person who is not more than 10 years younger than the account owner
- Minor child of the account owner
- Disabled person
- Chronically ill person
Payouts to Non-Designated Beneficiaries are Dependent on Account Owner Death
The payout period to a charity, an estate or a non-qualified trust beneficiary is dependent on when the account owner dies.
- If the account owner dies before their RMDs begin, the non-designated beneficiary will be subject to the 5-year payout rule same as before the SECURE Act.
- If the account owner dies after their RMDs begin, the payout will be made based on the account owner’s remaining life expectancy.
IRA Trust Planning Changes Under the SECURE Act
IRA account owners use trusts to control the beneficiaries’ access to the IRA funds and some use trusts to obtain tax deferrals. The trust planning done under the pre-SECURE Act should be reviewed and may need to be revised. With the implementation of the 10 year rule, these previously drafted trusts could allow income to flow out much quicker to beneficiaries than the trust grantor anticipated. There could also be higher than expected trust income tax due to the distributions coming out of the IRA to the trust in 10 years versus over the life expectancy of the trust beneficiary.