The SECURE Act: An Overview of What You Should Know

Theresa Marx
January 23, 2020

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law. Under this new legislation, substantial changes impacting retirement accounts came into effect on January 1, 2020.

While the SECURE Act reforms are supposed to make saving for retirement more accessible for a greater number of Americans, there could be unintended consequences, especially for beneficiaries of inherited retirement assets.

  • Required Minimum Distributions (RMDs) now start at age 72
    Americans are living longer and working longer, and now they no longer have to start taking withdrawals from IRA and 401k assets at age 70 ½. Under the SECURE Act, the age for when you must begin taking RMDs has increased to 72. 
  • No maximum age limit for IRA contributions
    The SECURE Act removes the maximum age limit for contributing to a traditional IRA. Even if you are well past the age of 70 ½, you can continue contributing to your traditional IRA as long as you are still working.
  • A 10-year rule for inherited IRAs
    Under the SECURE Act, most beneficiaries of inherited IRAs will have to withdraw inherited IRA assets from the account within 10 years following the death of the account owner if that account owner died after January 1, 2020. This new 10-year rule means most beneficiaries will no longer be able to “stretch” distributions, and any resulting tax payments, over their individual life expectancies.  As a result, there could be significant income tax consequences for your beneficiaries.

However, certain beneficiaries–called eligible designated beneficiaries (EDBs)–are exempt from the 10-year rule. EDBs include the surviving spouse or minor children (until they reach majority) of the account owner, disabled or chronically ill individuals, and beneficiaries who are less than 10 years younger than the deceased owner.  

It is important to note that the rules for non-designated beneficiaries (i.e., estates, charitable organizations and non-qualified trusts) remain the same as they were before the SECURE Act.

Other key takeaways:
 

  • Qualified charitable distributions (QCDs) can continue to be made starting at age 70 ½, but may be impacted by deductible IRA contributions.
  • Penalty-free retirement account withdrawals up to $5,000 for parents to offset qualified expenses associated with having or adopting a child.
  • Enhanced flexibility for the use of tax-advantaged 529 plan assets such as the ability to repay up to $10,000 in student loans. 

In light of the new rules under the SECURE Act, you may find that you need to reevaluate your retirement accounts and any related estate planning strategies.

What you’ll want to do:
 

  • Perform a thorough review of your retirement accounts and related estate planning strategies
    This is best done with the help of a qualified professional. Depending on your particular situation, there may be certain strategies you can implement that will help you capitalize on the benefits or minimize the impact of the new legislation.

    Some strategies that you may want to consider:

     
    • Roth conversion - By converting a traditional IRA to a Roth IRA, you will pay current income tax on the account, but you could lower the income tax burden for your beneficiaries. Because Roth IRAs are funded with after-tax contributions, your investments grow tax-deferred and qualified distributions are tax-free. However, keep in mind that Roth IRAs are still subject to the 10-year rule.
    • Charitable remainder trust - Naming a charitable remainder trust as the beneficiary of a retirement account could allow the trust beneficiaries to receive payments from the trust over a period longer than 10 years. In a charitable remainder trust, you designate one or more beneficiaries to receive an annual payment for life or for a term of years. Upon the death of the beneficiary(ies) or at the end of the trust term, trust assets are distributed to your selected charity.
  • Review your beneficiaries - With the new rules, most inherited IRA beneficiaries will have a much shorter timeframe in which to withdraw the account assets.

    If you have a retirement account that you planned to leave to one or more individuals, you should review your beneficiary designations to make sure they are aligned with the new rules and your intentions. Depending on how you designate your beneficiaries, you may be able to minimize the tax burden for those beneficiaries so they can reap the maximum rewards from their inheritance.
  • Review your trusts - If the beneficiary of your retirement account is a trust, you should review your trust to determine whether it is structured properly to protect your legacy or if you need to amend it.    

Because the SECURE Act entails so many broad and sweeping changes to the retirement and estate planning landscape, it is important to be proactive. We recommend that you work with your team of advisors–including your CIBC Private Wealth Management team and your tax and legal advisors–to help you determine the potential impact of the new legislation on your retirement accounts and your beneficiaries.

 

Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago, with 15 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.