On May 23, 2019, the House of Representatives passed a bill known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (“The Secure Act”). The proposed legislation has now made its way to the Senate and is likely to pass in the next couple of months.
The Secure Act
The Secure Act intends to modify employer-sponsored retirement savings plans, individual retirement accounts (“IRAs”), and other tax-favored savings accounts. Since 1986, when required minimum distributions (“RMDs”) first went into effect, life expectancy rates have increased, resulting in the need for the longevity of retirement funds. The Secure Act intends to increase the age for RMDs from 70½ to 72. Currently, RMDs from an employer-sponsored plan does not need to begin until the employee has retired; however, if the participant owns more than a 5% share of the employer who sponsors the plan, the RMDs must start once the account holder is 70½ years of age, regardless of whether he or she is retired. The increase to the age to begin RMDs will level the playing field for all plan participants, no matter the percentage of ownership of the plan.
Additionally, the bill introduces a new 10-year rule that would force plans to pay out all benefits within 10 years of the IRA owner’s death, with exceptions. These exceptions include when the beneficiary is the surviving spouse of the IRA owner, a person with disabilities, a minor, or fewer than 10 years younger than the deceased IRA owner. The 10-year rule would apply regardless of whether the deceased IRA owner reached the plan’s required beginning RMD date. The modification of these rules would increase certain filing failure penalties, helping to pay for the new benefits, which primarily helps owners.
The Secure Act changes the beneficiary’s eligibility date from September 30th of the year after the IRA owner’s death to the exact date of the IRA owner’s death. Present law allows a trustee to take action to affect who is the designated beneficiary. If passed, the Secure Act will no longer allow this.
Another provision of the Secure Act allows for Section 529 plans to use retirement accounts to pay for qualified student loan repayments (up to $10,000 and including siblings), private schools, homeschooling, and registered apprenticeships.
What does this all mean?
It is vital to understand that many retirement account owners use their plans as inheritance tools for next generations. Without taking advantage of stretch rules or naming a trust as the beneficiary, the 10-year rule looks to decrease these inheritances substantially. Trusts are not clearly excluded from the Secure Act’s modifications. If these are not added to the legislation, the Treasury may consider adjusting the regulations to add trusts to the list of exceptions. If not, a trust beneficiary may be essential to all IRA owners.
Some may dodge the 10-year rule by naming a charitable remainder unitrust (CRUT) as the beneficiary, allowing tax deferral over the term of the CRUT and raising the value realized by the non-tax exempt beneficiary. The advantages of using this benefit over the 10-year rule can be determined using financial modeling and present value analysis.
Another option to the 10-year rule would be to make a lifetime qualified charitable distribution. These distributions are direct contributions from an IRA to a qualified charity and can be up to $100,000 a year after the age of 70½. The Secure Act does not adjust this age or contribution limitation.
Ultimately, the rules surrounding RMDs are complex, and as a Financial Professional, you are likely to receive many questions about these rules from your clients. Download our "Frequently Asked Questions About Taking RMDs from IRAs" guide today so you can be prepared and help your clients understand how RMDs can affect their retirement withdrawal strategy.