The Impact of the SECURE Act on Retirement Plans
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law by President Trump and went into effect on January 1, 2020. The legislation included some significant changes including distribution rules for inherited retirements plans.
Inherited Retirement Accounts
Maximum Ten Year Withdrawal
An important item to note is that the SECURE Act has changed the timing of distributions from your 401(k) plans and traditional IRAs upon your death.
The majority of estate plans in the United States feature trusts and those trusts include retirement plans. Before the SECURE Act, the beneficiary you specified in the trust could extend distributions from the inherited retirement accounts over their life expectancy. Now, under the SECURE Act, retirement plan benefits must be completely withdrawn within ten years after the death of the account owner. There does not need to be any kind of fixed schedule; the only rule is that all assets must be withdrawn within ten years.
Analyzing your estate
With this change in mind, it is important that you consider how this could affect your estate planning.
First and foremost, you should review your beneficiary designations on your retirement plans. You do not need to change your beneficiary designation, but you should double check who is listed as your beneficiary.
A Trust as Beneficiary
If your retirement plan names a trust as the beneficiary or as a contingent beneficiary, you will need to know if the trust is set up as an Accumulation Trust or a Conduit Trust.
Any assets from a retirement plan that are distributed to a Conduit Trust are immediately distributed by the trustee to the beneficiary. Under the SECURE Act, that beneficiary will not be able to stretch out those distributions beyond the new 10-year period.
An Accumulation Trust is frequently used when a parent wishes to control distribution of retirement plan funds until their child reaches a specific age. If the child is an adult at the time of the parent’s death, the SECURE Act requires the trust to pay out retirement plan benefits within 10 years of the death of the parent. If the child is a minor, distribution must occur within 10 years of the child reaching adulthood. This means you may need to choose alternative trust strategies if the SECURE Act removes the financial control that is important to you.
A trustee will still be able to manage all retirement plan assets, but only for that 10-year period.
It will take some time for the full implications of the SECURE Act to manifest themselves.
If you have any questions about the impacts this legislation could have on your estate planning and retirement plans, contact Baker Law Group, P.C. for more information.
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