On December 20, 2020, the President signed a new law called the “SECURE Act.” This stands for Setting Every Community up for Retirement Enhancement. A large part of the SECURE Act involved changes to IRAs, Roth IRAs, and qualified retirement plans. This article will describe some of those changes that became effective January 1, 2020.
This Act moves the minimum age that individuals have to begin withdrawing retirement plan benefits from 70 ½ to 72, allows small business owners to set up less costly retirement plans for their employees and allows some part time workers to become a participant of an employer retirement plan. Additionally, the provisions of the SECURE Act require that all IRAs, Roth IRAs, and qualified plans be distributed within ten years of the death of the owner of that retirement account instead of being able to be paid over the lifetime of the beneficiary. However, there are some exceptions to that general ten-year rule. Those exceptions are as follows:
- If there is a non-designated beneficiary of one of those accounts, then there is a five-year rule in which the funds will need to be distributed within five years of the death of the owner of that account.
- If the account has a designated beneficiary, which the SECURE Act defines, then the funds in the account must be distributed within ten years of the death of the owner of the account.
- If there are certain eligible designated beneficiaries, such as spouses, minor children, disabled beneficiaries, or chronically ill beneficiaries, then those individuals can use their life expectancy to withdraw the funds from those retirement accounts effectively keeping the prior stretch IRA provisions.
Generally speaking minor children must remove all the funds from the retirement account within in 10 years of attaining age 18. However, minor children are defined in the SECURE Act as children who have not reached the age of majority (18), and an individual can also be considered a minor child if they have not completed a specified course of education and are under the age of 26. Therefore, in this circumstance, a minor child beneficiary may use their life expectancy for withdrawals from retirement plans until they reach 26 years of age.
Disabled individuals are defined in the SECURE Act as “an individual who is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or to be of long, continued, and indefinite duration.” If they are deemed to be disabled, then the disabled individual’s life expectancy can be used to withdraw the funds from the retirement account.
The SECURE Act defines a chronically ill individual as someone who is unable to perform at least two activities of daily living for a period of at least 90 days or if they have a disability requiring substantial supervision to protect them from threats to their health and safety because of a mental impairment. If that individual is determined to be chronically ill, then the chronically ill individual’s life expectancy can be used.
Therefore, when preparing your estate plan, please make sure that you are aware of the changes provided in the SECURE Act and how those changes will affect the distribution of your retirement accounts for your respective beneficiaries. Please contact your local estate planning attorney to assist with these types of matters.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.