Year-End Tax Act Brings Changes to Retirement Accounts

By Alaina Davalos, Esq. and Juli Findling, Paralegal

On December 20th, 2019 President Trump signed into law a spending bill which included the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act.  This tax act went into effect on January 1st and promises to strengthen retirement security for many Americans.

In summary, the bill increases the age for required minimum distributions for retirement accounts from 70.5 to 72, encourages small businesses to offer retirement plans for its workers, removes the maximum age cap for contributions to traditional individual retirement accounts, and most significantly eliminates the ‘stretch’ option for non-spouse designated beneficiaries who inherit a retirement account.*1

The SECURE Act is the most impactful retirement legislation of the past decade and puts into place numerous provisions that affect both individuals and employers. Below you will find more detailed information regarding some of the provisions and how they may affect you from an estate, tax and business planning perspective.  If you have questions or concerns regarding this legislation, please contact us at 404-255-7400 or email us at info@hoffmanestatelaw.com.

Estate Planning

As a means of generating more tax dollars, the 2019 SECURE Act removed the ‘stretch’ provision for inherited IRAs. While the change might not affect the majority of inherited IRA beneficiaries, who typically take their entire distribution upon inheritance, the younger, non-spouse beneficiaries who are in their peak earning years will certainly feel its effects.

Until January 1, 2020, beneficiaries of inherited retirement plans, such as 401(k)s and traditional IRAs, would have the option to postpone taking the inherited retirement benefit distributions and instead receive distributions across their lifetimes, the “life expectancy payout rule” – which offered them the opportunity for the most tax benefits. Further, for those owners of retirement plans who wanted to exercise more control over how these inheritances were to be distributed – to provide protection from creditors, divorce proceedings, or for immature or special needs beneficiaries – individuals had the option to use IRA trusts to pass retirement assets from their IRAs, through the trust, to their chosen beneficiaries, and to stretch out the payments.  This arrangement allowed for the best of both worlds – tax AND non-tax benefits.

The SECURE Act, which went into effect on January 1, 2020, changed things. Now, non-spouse beneficiaries of inherited retirement plans must withdraw the entire account within ten years of the year of death of the account owner.  The new law, however, does not affect surviving spouse beneficiaries, who will continue to get the 10-year distribution exemption, along with minor children, disabled or chronically ill individuals and those beneficiaries not more than ten years younger than the deceased.

Trust Planning

Trusts that are set up as beneficiaries will continue to afford all the same pre-SECURE Act protections, minus the stretch provision.  If an IRA trust with a ‘conduit’ provision was used to protect the account balance, only required minimum distributions (RMDs) – much smaller amounts – were vulnerable to creditors and divorcing spouses.

As a result of the SECURE Act, this will no longer be the case and the trustee will be required to distribute the entire account balance to a beneficiary within ten years of the owner’s death. However, alternative trust structures are available through which the trustee can take any required distributions and continue to hold them in a protected trust for beneficiaries. Therefore trust holding IRAs should be reviewed right away to ensure the purpose and objective for which they were set up are being met.

What’s the upside to the SECURE Act?  These beneficiaries are no longer subject to required minimum distributions, thereby allowing for up to ten years of tax deferment and asset growth on the inheritance.

Tax Planning

Retirement at 70.5 sounds like the dream, but not everybody is financially prepared by that age to say goodbye to the 9 to 5 and hello to that 10:00 AM tee time.  Thankfully, the tax laws just changed to benefit those on the brink of retirement. Under the new SECURE Act, the maximum age cap for individuals who haven’t hit 70.5 by the end of 2019 has increased to age 72. While a year and a half might not seem like it would have a great impact on your retirement, this one and a half year window gives potential retirees additional time to grow their 401(K)s and IRAs (think about all that compounding interest!), as well as convert any traditional IRA into a Roth IRA without having to worry about the impact of required distributions or taxes. Couples contributing over $14,000 ($7,000 each) to their IRAs can receive a valuable tax deduction while simultaneously saving for the future.*2

Business Planning

To all the small business owners out there – have you ever wanted to give back to your employees and help them with their retirement? Now’s the time.

Several changes were made to encourage small employers to offer retirement benefits to their employees such as a $5,000 tax credit + $500/year for up to three years for small businesses (<100 employees) that automatically enroll their employees. Also employers with 401(k) plans must now offer employees who work between 500 and 1000 hours year an additional means to participate in the plan. The rule change would only affect 401(k) cash or deferral arrangements, and no other qualified plans.

The SECURE Act allows unrelated employers to band together to participate in a new class of pooled multiple employer plans (MEPs) creating a single retirement plan for their combined employees, benefiting small businesses by:

• Reducing administration costs
• Limiting legal liability
• Cutting regulatory red tape

Also, Congress is giving small employers a further boost by increasing their credit for pension plan start-up costs.

Finally, the SECURE Act updates the safe harbor provisions for plan sponsors to select annuity providers in order to offer in-plan annuities inside of a 401(K), which encourages more plan sponsors to offer them within the 401(K) and giving more options to employees – a plus for those employees who like the protection of a guaranteed income that annuity offers.

But once you’ve got that retirement plan up and running, don’t think about dipping into those funds – the SECURE Act specifically prohibits businesses from taking loans from the plans, including to pay off company credit cards!

*1 If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates.

*2  Roth IRA withdrawals are tax free as long as you meet certain requirements. The general goal of Roth conversion is to convert taxable money in an IRA at lower tax rates today than you expect to pay in the future.