The SECURE Act Changes the Rules on Inherited Retirement Accounts

On December 20,2019 President Trump signed the SECURE Act (Setting Every Community Up for Retirement Enhancement) into law. The Act took effect on January 1, 2020, and is the most significant legislation affecting retirement accounts in decades. The Secure Act 2.0 was enacted in 2023, and changes made by that Act take effect in 2023 and later years.

The Act changed the required beginning date for required minimum distributions (RMDs) from retirement accounts and eliminated age restrictions for contributions to traditional IRAs by individuals who are working. Secure 2.0 made further changes to the required beginning date rules. Under Secure 2.0, RMDs begin at age 73 for those born in the year
1959 or earlier, and at age 75 for those born in 1960 or later.

The age at which RMDs are required was increased to age 72 for years 2020 through 2022 by the original Act. In 2022, SECURE 2.0 was passed, increasing the age at which RMDs must be taken to age 73 for 2023 with additional increases in ages to follow.

From an estate planning perspective, the Act significantly shortens the period of time over which beneficiaries must withdraw money from inherited retirement accounts, requiring most beneficiaries to withdraw all of the funds from an inherited retirement account within 10 years of the death of the account owner.

Under the Act, this 10-year withdrawal rule does not apply to 5 groups of individuals: (1) spouses, (2) beneficiaries who are 10 or fewer years younger than the account owner (i.e. a sibling, a friend), (3) minor children (but only until they reach the age of majority), (4) disabled individuals, and (5) chronically ill individuals.  These individuals are still permitted to take distributions from inherited retirement accounts based on their life expectancy.

As a reminder, under the old law, any beneficiary could choose to withdraw the balance of inherited retirement accounts over his or her life expectancy.  Trusts could also be structured to allow distributions from an inherited retirement account to be made to the trust over the beneficiary’s life expectancy.  The advantages of this “stretch” payout were to required to be
distributed on an annual basis, required minimum distributions, spread the payment of income tax on those distributions over a longer period of time, and allow for continued tax-deferred growth.  

From an income tax perspective, the Act’s shorter 10-year time frame for taking distributions will require income tax to be paid on an accelerated basis, possibly bumping beneficiaries into higher income tax brackets.  If distributions are paid to a trust, tax on the distributions will be paid at higher trust income tax rates unless the distribution is paid from the trust to the beneficiary in the same tax year.  or unless the Trust is structured so that the income is taxable to the beneficiary whether or not distributed.

Many pre-2020 trusts require that distributions from retirement accounts to be distributed out of the trust to the beneficiaries each year. This was because , under the old law requiring that the RMDs be distributed guaranteed that the trust qualified as a designated beneficiary ensuring that the RMDs could be stretched out over the beneficiary’s life expectancy. Many trusts require distributions to be paid out to beneficiaries each year, which under the old law allowed the trust to qualify for the income tax advantages of the “stretch” payout.  Under the Act, these required distributions will be much larger than under prior law and could create unintended consequences to beneficiaries from an income tax and asset protection standpoint.

Because of these changes, it is crucial that we meet with you if you have significant retirement accounts (IRAs, 401ks, 403bs, etc.) to review the provisions of your estate plan as they relate to these accounts, discuss the provisions of the Act as they relate to your situation, and amend trusts or change beneficiary designations as necessary.

Please contact Joanne LoetzMackenzie Sayward at 781-461-1020 or loetz@ssbllc.com to schedule an appointment to meet with one of our attorneys to discuss how the Act impacts your plan and your retirement accounts.