New Year, New You, New Tax Laws

January 3, 2020 | Trusts & Estates

A new law, which took effect on January 1, 2020, will change the tax treatment of retirement savings.

The SECURE Act was signed by the President on December 20, 2019, and became Public Law No: 116-94[1].

The revised sections of the tax code make significant changes to the laws governing retirement savings. Many of the changes increase retirement saving opportunities, while some of the changes significantly limit the ability to stretch an inherited qualified pension, profit sharing, and stock bonus plans (“Retirement Plan”) over a non-spouse beneficiary’s lifespan.

Here’s what you need to know about the new law.

Does my Retirement Plan still work?         

Yes, your Retirement Plan still allows you to save pre-tax dollars and allows them to grow tax deferred. In certain circumstances, your retirement savings options are greater. For example under the prior law the retirement savings deduction was allowed only for savers under 70 ½. The new law eliminates the maximum age for making qualified retirement contributions.

Do I still have to take Required Minimum Distributions (RMDs)?         

Yes, you do, however, the required beginning date age (RBD) for RMDs has changed. Section 401 has been amended to increase the RBD from age 70 ½ to 72. However, if you reached 70 ½ before December 31, 2019, you must continue taking your RMDs according to the prior rules.

Were my Designated Beneficiaries changed?        

No, the law did not revoke your properly designated beneficiaries. The new law changes beneficiary classifications and their withdrawal rights after your death.

Can I still withdraw my Retirement Plan over my life expectancy?       

Yes, you can still stretch your Retirement Plan over your life expectancy. The new withdrawal rules relate to inherited Retirement Plans for employees dying after December 31, 2019, meaning the changes affect your beneficiary’s ability to stretch the withdrawals.

The prior law provided designated beneficiaries with different options regarding your remaining Retirement Plan. The new law distinguishes between designated beneficiaries and Eligible Designated Beneficiaries. Unless your designated beneficiary is an Eligible Designated Beneficiary (see below), they must take full distribution of the Retirement Plan within 10 years of your death, whether or not you have begun taking your RMDs.

Who is an Eligible Designated Beneficiary?          

An Eligible Designated Beneficiary is:

(i)                 Your Spouse;

(ii)               Your minor child (under the Code);

(iii)             A person who is disabled (under the Code);

(iv)             A person wo is chronically ill (under the Code); or

(v)               A person who is not more than 10 years younger than you are.

What is the benefit of being an Eligible Designated Beneficiary?           

Eligible Designated Beneficiaries have the option of taking Retirement Plan distributions over a longer time span. If the Eligible Designated Beneficiary is a minor child, they must withdraw the balance of the Retirement Plan within 10 years of reaching majority. Eligible Designated Beneficiaries (other than minor children) can stretch distributions over their life expectancy. The remaining Retirement Plan must be distributed within 10 years of the Eligible Designated Beneficiary’s death.

I set up a trust as the beneficiary of my Retirement Plan, what do I need to do?          

The short answer is that you need to make an appointment with your attorney and tell them you specifically need to review the qualified plan trust. The trust you established is still viable. The changes in the law may change the time the trust has to withdraw the remaining Retirement Plan. If the trust has an Eligible Designated Beneficiary, they may still be able to stretch the distributions.

Does the SECURE Law affect business owners? 

Yes, while most SECURE Law discussions focus on individuals, the new law has new requirements for business owners. Your employee benefits department must meet with your tax, legal and other compliance advisors to ensure that your company retirement plan complies with the new law.

[1] A copy of the Law can be found at the SECURE act is located in Division O from pages 604 through 649 of the 715-page document.

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