The SECURE Act has passed! We believe some clients will be impacted in one of these three ways. Download our free report on Estate Planning with IRAs to read more.
1. The Required Minimum Distribution (RMD) Age was increased from 70 ½ to 72.
This is a positive change and will benefit you if you have a large amount of tax-deferred savings in an IRA. You can now grow your IRA money for another year and a half if you’re not yet in a position where you need to start taking your RMDs.
2. If you are over the age of 70 ½ and have earned income, you can continue to contribute to your traditional IRA.
Before this law, if you were 70 ½ or older, you could not contribute to your traditional IRA like you could with a Roth IRA. Now if you are still working, you may continue to contribute all or some of your earned income to your IRA. This is another positive change!
3. Lastly, there were changes to eliminate “Stretching” an inherited IRA for non-spouses.
Up until this law passed, non-spousal beneficiaries of IRA accounts like children, could typically take distributions from an inherited IRA over their own life expectancy, which means it could have been drawn out over many years depending on how old they were at the time the account was inherited. This strategy was used to reduce the tax burden of receiving a full inheritance during peak earning years (think 45-65-year-old adult children). Receiving a large inheritance during this time could put your heirs into a higher tax bracket, which would ultimately reduce the inheritance they receive from you.
Now, the SECURE Act requires most non-spousal beneficiaries to withdraw 100% of the inherited IRA over a 10-year period. This change would likely only impact IRA heirs that are set to inherit a large amount since smaller IRA amounts are typically used up within 10 years by most.
If you are concerned about the potential tax burden of your non-spouse IRA heirs receiving their inheritance faster, you may need to have your estate plan adjusted. Call our office to learn more about upcoming seminars where we’ll be reviewing these changes in greater detail or to schedule a consultation with an attorney.
What did the SECURE Act change for estate planning?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 eliminated the stretch IRA for most non-spouse beneficiaries, replacing it with a 10-year rule that requires full distribution of inherited retirement accounts within 10 years of the account owner’s death. This fundamentally changed how IRAs can be used as multigenerational wealth transfer tools.
What did SECURE 2.0 add to the original SECURE Act?
SECURE 2.0, enacted in December 2022, added annual required minimum distributions within the 10-year period for non-spouse beneficiaries when the original owner had reached their required beginning date. It also increased the RMD starting age to 73 for those born in 1951 or later, and made other changes to qualified retirement plan rules.
Do I need to update my trust if it was drafted before the SECURE Act?
Possibly, and this is critical. Many trusts drafted before 2020 used conduit trust provisions designed for the stretch IRA. Under the 10-year rule, a conduit trust may actually accelerate distributions in a way that is unfavorable – particularly for trusts with a disabled beneficiary or a spendthrift concern.
What is a see-through trust for IRA purposes?
A see-through trust (or look-through trust) meets IRS requirements allowing the trust beneficiaries to be treated as designated beneficiaries of the IRA for distribution purposes. To qualify, the trust must be irrevocable at the owner’s death, have identifiable beneficiaries, and the trust document must be provided to the IRA custodian by October 31 of the year following the owner’s death.
How does the SECURE Act affect estate plans that use trusts as IRA beneficiaries?
Trusts named as IRA beneficiaries must be carefully evaluated under the SECURE Act framework. A conduit trust may cause faster distributions. An accumulation trust provides more flexibility but may result in compressed trust income tax brackets. The right structure depends on the beneficiary’s situation, tax bracket, and the trust’s purpose.
Should I name my spouse or my trust as the IRA beneficiary?
Spouses have the most flexibility – they can roll the inherited IRA into their own IRA, delay distributions, and apply their own RMD timeline. A trust may be appropriate when the beneficiary has special needs, is a minor, or has creditor protection concerns. The right answer depends on your specific family and financial situation.
