The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law back in December 2019. The SECURE Act is not a complete overhaul of the American retirement system. However, the act made several significant changes to the system, which impacts retirement and estate plans. Estate planning attorneys should be aware of these changes when advising clients how to manage their assets and to ensure that client objectives are met.

The act's most notable impact is the closing of the "stretch" IRA loophole. Stretch IRA refers to the concept of deferring commencement of required minimum distributions (RMDs) from retirement accounts well beyond the death of the initial account holder. Prior to the act, any designated beneficiary of an IRA could defer RMDs on the IRA for the beneficiary's lifetime. The old RMD rules typically required individuals to begin receiving payments from an IRA at age 70 ½ so that assets held in retirement accounts can begin to be taxed. When an IRA is "stretched" the IRS retirement assets remain untaxed for an extended period. In the case of a beneficiary who was much younger than the initial account holder, RMDs could be deferred for decades. The SECURE Act curtails stretching by requiring most IRAs to be distributed in full within 10 years of the account holder's date of death. The rule applies to traditional IRAs, 401(k) plans and other defined contribution plans. However, ROTH IRA's remain exempt from RMDs under the act.

The act does not entirely eliminate the stretch IRA. Instead, it establishes the concept of "eligible designated beneficiaries" who are individuals that can still take advantage of the stretch IRA. Under the act, surviving spouses, minor children, disabled individuals, chronically ill individuals and individuals who are not more than 10 years younger than the initial account holder are all considered "eligible designated beneficiaries" if designated by the account holder. Notably, minor children who reach the age of majority cease to be eligible and must receive their distribution within 10 years of their 18th birthday. Accordingly, the number of individuals who can stretch an IRA is greatly reduced by the act. The eligibility determination is made as of the account holder's date of death. Accordingly, these rules apply to account holders who die in 2020 or later.

For estate planning purpose, attorneys need to advise most clients of this change. Individuals who have designated their adult children as beneficiaries of their IRA will need to be aware that those children could be subject to a higher tax burden under the new rules. Additionally, individuals who may be named as beneficiaries of large IRAs will likely need to restructure other income streams in order to manage the potential tax increase following the death of the account holder. For instance, individuals may want to rely on IRA distributions as a primary source of income and shift other assets into credit shelter trusts or other tax exempt accounts.

Individuals who have named a trust as IRA beneficiary will want to consider changing the beneficiary designation since trusts are not considered "eligible designated beneficiaries" under the act. This is particularly important when the trust is designed to benefit one or more individuals who are considered "eligible" under the act. For instance, if an account holder has named a trust as the designated beneficiary of an IRA, and the trust is intended to primarily benefit the account holder's spouse. The account holder may want to change the beneficiary designation to go to the spouse directly because the spouse will be able to stretch the IRA and the trust will not.

Attorneys and other estate planning professionals should also emphasize the benefits of ROTH IRA conversions for both current account holders and their beneficiaries. Since ROTH IRAs are still not subject to RMD rules, ROTH IRAs are an even more attractive option for long term planning following the act.

Besides the reduction of the stretch IRA, the other marquee change instituted by the Secure Act concerns the RMD commencement date. Under the act, the beginning date for required minimum distributions will be raised from age 70½ to 72. Thus, individuals that turn 70½ in 2020 or later will not be required to begin RMDs until they reach age 72. However, individuals who turned 70½ in 2019 will still be required to begin RMDs this year. In addition to increasing the RMD commencement date, the act will allow individuals to continue contributing to traditional IRAs beyond age 70½ beginning in 2020.

Attorneys should advise clients of these changes and the potential additional savings to be gained from the extended the period of investment. Attorneys engaged by employers or other sponsors of retirement plans should also note these changes to the RMD beginning date to ensure clients are complying with the Internal Revenue Code.

Not all of the changes impact retirees and older investors. The act may provide younger individuals with greater access to savings without penalty. For instance, the act allows penalty-free withdrawals from retirement accounts of up to $5,000 per account to cover birth or adoption expenses. Couples with separate accounts can withdraw up to $10,000. Similarly, changes to the 529 rules will allow for withdrawals of up to $10,000 from 529 accounts for repayment of student loans. Lastly, the act is intended to provide greater access to employer-sponsored 401(k) plans. Part-time workers, who have worked at least 1,000 hours in one year or at least 500 hours for three consecutive years, are now eligible to participate in retirement plans.

From an estate planning standpoint, the SECURE Act is not likely to have a significant impact on current practices. However, attorneys should be aware of the changes in order to direct clients toward savings opportunities and away from tax pitfalls.

Brandon A. Betts is an associate in Meyer, Unkovic & Scott's multiemployer plans and employee benefits, and private clients practice groups. Hefocuses his practice on the representation of multiemployer and single employer employee benefit plans.