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Effect of the SECURE Act on Retirement Account Beneficiary Designations

A law that was enacted on December 20, 2019 known as the "Setting Every Community Up for Retirement Enhancement Act" - also known as the "SECURE Act". The new law made major changes to the tax laws governing contributions and distributions from retirement accounts. Generally, the SECURE Act: (1) increases when required minimum distributions (often termed "RMD") must start; (2) allows contributions after age 70 1/2; and (3) modifies the payout periods for certain beneficiaries of a retirement plan (generally eliminating the favorable "stretch payout" over a beneficiary's lifetime). 

RME - Required Minimum Distributions

One taxpayer friendly part of the SECURE Act is it increases the required beginning date for RMD's, or when a participant must start taking distributions from his or her account. Under the prior law, a participant generally had to begin taking RMDs when he or she turned age 70 1/2. As a result of the SECURE Act, the law now allows a participant to wait until reaching 72 before starting RMDs. Note, this favorable change only applies to individuals who attain age 70 1/2 after December 31, 2019.

Retirement Contributions after age 70 1/2

Another favorable part of the SECURE Act is it is now permissible for an individual to make deductible contributions into his or her retirement  account regardless of his or her age (as long as he or she continues to work). Prior to the SECURE Act, a participant could not make a deductible contribution to his or her retirement account after reaching age 70 1/2. 

Modification to Beneficiary Payout Options

One goal of the SECURE Act is to shorten the distribution payout rules for beneficiaries (other than a spouse) of retirement accounts and IRAs (someone who receive an interest as a result of the death of a participant). Prior to the SECURE Act, a beneficiary had the favorable option of electing to "stretch" the taxable payout of an inherited account over the respective beneficiary's life expectancy. For a younger beneficiary, this could result in payouts over a 50-60 year period (or longer). Under the SECURE Act, generally a beneficiary (other than a spouse) now must receive his or her interest in an inherited account over a period not to exceed ten (10) years. Note, there are several limited exceptions under the SECURE Act to the ten (10) year required payout for a non-spouse beneficiary.

As indicated, there are many changes and new options resulting from passage of SECURE Act. In light of this new law, existing beneficiary designations and estate plans (Wills and Trusts) should be reviewed and planning options considered. If you have questions about the effect of the SECURE Act on your estate plan or wish to create a plan that best protects your assets for your beneficiaries in light of these changes, please contact a member of MacDonald Illig's Trust and Estates Practice Group.