With the seemingly endless in-fighting among members of Congress making the headlines recently, you may have missed the news of a law intended to provide some long-overdue savings and retirement reforms that passed late last year. The Setting Every Community Up for Retirement Enhancement (SECURE) Act took effect on Jan. 1.
This law, among other things, allows people to make contributions to traditional individual retirement accounts (IRAs) past the previous cut-off age of 70 ½ and allows some part-time workers to have 401(k) plans.
There’s also a provision that impacts anyone who is leaving their IRA or 401(k) assets to an heir or other beneficiary in their estate plan and to those who inherit these accounts. Previously, anyone who inherited an IRA or 401(k) could choose to “stretch” their distributions over their lifetime. When those accounts had significant assets, that meant they could provide a steady stream of income for many years.
However, with the new law, if the account holder died after Dec. 31, 2019, many beneficiaries must now withdraw all of the money from those accounts within ten years of the account holder’s death. This ten-year requirement does not apply to:
- Minor children
- Beneficiaries who are less than ten year younger than the deceased account holder
- Disabled or chronically ill beneficiaries
If you have designated beneficiaries in your estate plan for your IRA and/or 401(k), it’s important that they understand this new requirement — particularly if that inheritance will involve a very large amount of money. Of course, the new requirement doesn’t mean they have to spend the money within ten years — only that they have to take the full distribution on it. This could have significant tax implications unless they take steps to reduce those — like putting the funds in an inherited IRA.
If you have inherited an IRA or 401(k) from someone who passed away this year and don’t fall under the exempted categories, it’s also essential to understand the new law.
Either way, it’s wise to seek the guidance of an estate planning attorney and a financial or tax advisor.