New Decade, New Retirement Rules

New Decade, New Retirement Rules
What You Need to Know About the SECURE Act
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Emily B. Taylor


Effective January 1, 2020, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act making changes to the rules around retirement plans. This bill did many things, but here we hit the high points.

The SECURE Act (“Act”) is designed to further incentivize employers to offer retirement plans. One way the Act does this is by allowing annuity investments within 401(k)s without the employer’s fiduciary responsibility of ensuring the annuities are appropriate (shifting the burden to the insurance company).

The Act also widens the opportunity for small businesses to offer plans by doing away with the “common characteristic” rule, allowing more employers to pool together to establish plans; further the Act allows long-term part-time workers to participate in employee sponsored retirement plans. Finally, a tax credit is available for employers who set up a 401(k) or SIMPLE IRA plan with automatic enrollment.

The changes getting the attention of estate planners though, are the changes to required minimum distributions (RMDs) and the loss of stretch IRAs. If a participant/employee in a retirement plan did not reach the age of 70 ½ by December 31, 2019, then that employee is not required to take RMDs until he or she reaches age 72.

How are these changes—allowing individuals to hold and grow their funds a little while longer—being paid for? Presumably, the monies lost by the IRS in these changes will be made up with the elimination of the stretch IRA. As of January 1, 2020, unless the beneficiary of a retirement account falls into a specific exception, his or her receipt of a retirement account must be fully paid out within 10 years of death of the account owner. Importantly, the exceptions to this rule are the following individuals: spouses (who may use their own life expectancy); minors (children of the account owner with minor status); disabled individuals (as defined by IRC Section 72(m)(7)); chronically ill individuals (as defined by IRC Section 7702 B(c)(2), and with a caveat found at Title IV, Section 401(a)(2)); and those 10 years (or less) younger than the employee. Further, stretch IRAs created by those individuals who died prior to January 1, 2020 may still use the old payout rules (however, any successor beneficiary is subject to the new 10-year rules). It should also be noted that if the IRA owner dies prior to the required beginning date, for a non-qualifying beneficiary, the account must be distributed by the last day of the 5th year. If death occurs after the required beginning date, the life expectancy of the IRA owner for payout to a non-qualifying beneficiary will still be used. Further, charitable contributions from an IRA to qualified charities up to $100,000 are still allowable and deductible beginning at age 70 ½.

Related, but not part of the SECURE Act, is the proposal of new life expectancy tables by the IRS. These new tables, generally, assume a longer life expectancy thus the RMDs will be smaller and the retirement accounts should last longer. However, if these tables pass, the longer life expectancy may cause some younger individuals to think twice before naming his or her designated beneficiary since the life expectancy of an individual may exceed 10 years on the new tables compared to the old tables (which haven’t seen an update since 2002).

The proposal in the Federal Register may be found here (https://www.federalregister.gov/documents/2019/11/08/2019-24065/updated-life-expectancy-and-distribution-period-tables-used-for-purposes-of-determining-minimum).

The SECURE Act and proposed life expectancy tables gives reason for many to revisit his or her estate plan, retirement plan, and gifting strategies. For the full text of the Act, see https://www.congress.gov/bill/116th-congress/house-bill/1994/text.

Rapp & Krock, PC. frequently counsels planning that is affected by amendments such as the SECURE Act. Should you have any questions or concerns about these new changes which are already in effect, please contact Emily Taylor at 713-759-9977 or ETaylor@RappandKrock.com

ABOUT THE AUTHOR: Emily B. Taylor is a Senior Associate at Rapp & Krock, PC in the Probate, Estates, Elder Law, and Trusts group.


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