The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law in 2019. As its name suggests, this law is aimed at increasing access to tax-advantaged retirement accounts and preventing Americans from outliving their assets. The Act makes it easier and more advantageous for employers to set up 401(k) plans for employees. It makes the 401(k) plans accessible to part-time employees and increases penalty-free withdrawals from these plans to defray the costs of having or adopting a child. Probably the most popular change brought by the SECURE Act was raising the age to take Required Minimum Distributions from 70½ to 72. There is no longer a maximum age for IRA contributions.
However, the SECURE Act may also impact IRA accounts in potentially negative ways. Most obviously when the account owner dies and leaves the retirement account to someone other than his or her spouse (e.g. his or her children). Under the old rules, a non-spouse beneficiary could elect to withdraw an inherited IRA account over the beneficiary’s life expectancy, therefore spreading the income tax burden over a long period of time and reducing the tax burden. The new rules under the SECURE Act require most non-spouse heirs to withdraw from the inherited IRA account over a maximum of 10 years from inheritance. This greatly compresses the time period for withdrawal, generally resulting in an adult beneficiary paying more tax in a shorter period of time. For parents leaving IRA accounts to their adult children, this may mean the child paying all the income tax on the accounts during the child’s peak earning years, reducing the actual benefit to the child, and raising billions of dollars in additional tax revenue for the government.
The SECURE Act has made some strides in making retirement planning accessible to more Americans and increasing the ability to contribute to retirement plans. However, leaving your retirement accounts to non-spouse beneficiaries will need to be carefully planned to benefit your heirs. Marking sure that you have chosen the appropriate beneficiaries for your IRAs and 401(k)s is an important part of your estate planning. Changes to the SECURE Act may also be coming soon as the House of Representatives passed the proposed SECURE Act 2.0 by a near-unanimous vote on March 29, 2022.