If you have a retirement plan (IRA, 401(k), profit sharing plan, etc.) payable to your children or grandchildren (or trusts for them), this could be a VERY BIG CHANGE for you. As busy as life is, this deserves your attention now.
Congress has been working on keeping the government open. To do that, it needed a new spending bill. According to Congress.gov and multiple business news outlets, the House (on Monday) and the Senate (today) have approved a spending bill (H.R. 1865) which will be headed to the White House for signature soon.
The Congress needed to raise more revenue (that means, raise taxes). So they did. They tacked onto the spending bill the SECURE Act. The name is an acronym for “Setting Every Community Up for Retirement Enhancement.” That Act passed the House originally in May by a huge margin – 417 to 3. It has languished in the Senate until now.
Key things to remember about the SECURE Act:
- It would require all inherited IRAs (not payable to a spouse) to pay out within 10 years. There are exceptions for minor children, disabled individuals and chronically ill beneficiaries.
- It increases the age for required minimum distributions from 70-1/2 to 72.
- It eliminates the prohibition that had existed preventing workers from making traditional contributions to IRAs after age 70-1/2.
- It allows penalty free withdrawals of $5,000 for new parents.
- It allows part-time employees to participate in the company 401(k).
- It allows retirement plan officials to fund retirement for employees with commercially available (insurance company) annuities.
- It would allow $10,000 of a 529 plan to be used to pay student debt.
- It allows an easier way to create multiple-employer plans.
Proponents of the Act say its a game changer, and will help substantially with retirement savings. Critics point out that very few Americans have any sort of real retirement savings, so saving Social Security should be the real priority – that this merely is window dressing.
For many people, #1 is really a BIG game changer. It eliminates “stretch” IRAs. For the person whose spouse or children don’t really need the assets in a retirement plan, the ability (now a thing of the past) to name grandchildren who would be required to take assets a little at a time over their lifetimes, really allowed the retirement account to stretch over decades, while continuing to enjoy the tax deferrals of the IRA.
Key also is that assets coming out will be taxed sooner. The estimated revenue boost is $15.7 billion more in tax revenue over ten years.
On top of that, creditors will have access to those assets sooner, unless the beneficiary is an IRA trust with spendthrift protection. Trusts should be considered, and consideration should be given to the tax rates applicable to trusts. So-called “conduit trusts” may fall out of favor since the stretch won’t be available (with the limited exceptions listed above). “Accumulation” trusts may be more popular now even though they can be tricky to created.
Action Item: Every person who has named a child or grandchild, or a trust for them, as a beneficiary of a retirement plan (401(k), profit sharing plan, IRA, etc.) ought to schedule an appointment with their estate planning attorney and retirement advisor ASAP.
Action Item: Every estate planning attorney, CPA and investment advisor needs to know about this ASAP. List serves are on fire with comments and questions.
Just FYI, the text of the entire spending bill is 1,773 pages long. The SECURE Act provisions begin on page 1,532.