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Legal Notes: What You Need to Know About the SECURE Act

Attorney Seunghee ChaAttorney Seunghee ChaThe Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which went into effect on January 1, 2020, brings sweeping changes to estate planning with qualified retirement assets. These changes include removal of maximum age limits on IRA contributions (formerly capped at age 70½) and raising the required minimum distribution age to 72 from 70½. 

Most notably, the new federal law eliminates “stretch” payouts for many surviving beneficiaries (i.e., payout over the life of a surviving beneficiary). The new law requires a maximum payout period of ten years after the employee/IRA owner’s death for distributions from defined contribution plans [e.g., 401(k) plans] and IRAs. 

Most notably, the new federal law eliminates “stretch” payouts for many surviving beneficiaries (i.e., payout over the life of a surviving beneficiary).

The SECURE Act makes exceptions for distributions to “eligible designated beneficiaries”: the employee/IRA owner’s surviving spouse or minor child, a disabled or chronically ill individual, or an individual who is not more than ten years younger than the employee/IRA owner. The elimination of the stretch payout to those other than eligible designated beneficiaries means less tax-deferred growth. 

Another important, but less talked about, aspect of the new law is a provision that makes it easier for employers to offer annuity products in their retirement plans. The result could mean larger percentages of annuities in retirement accounts. Employees would be well advised to speak to an independent fee-only financial planner before making any decisions regarding annuities in their retirement plans.

Many people relied on stretch payouts in formulating their estate plans, and drafted trust provisions accordingly. If you have a trust that is the beneficiary of your retirement plan, the elimination of the stretch payouts may affect your estate planning and cause your trust to no longer accomplish what you intended. Even if you do not have a trust as part of your estate plan, you may have designated certain individuals as direct beneficiaries of your retirement plan to optimize the stretch payout. 

Retirement assets constitute a big part of people’s wealth. Given the SECURE Act’s major impact on the future growth and income tax liability of these assets, it is advisable to evaluate how the new law affects your family and your estate plan.