The SECURE Act, more formally known as the “Setting Every Community Up for Retirement Enhancement Act,” was enacted December 20, 2019. The SECURE Act made significant changes to the rules for distributions from IRAs and retirement plans.

Lifetime Distributions Begin at age 72

The good news under the SECURE Act is people can wait until age 72 to begin taking their minimum required distributions. Under prior law, age 70½ was the age when minimum required distributions had to begin.

Distributions at Death Subject to New 10-Year Rule

Under prior law, certain death beneficiaries could “stretch” payments over their lifetime. For example, if you named your daughter as beneficiary, she could take distributions from your IRA or retirement plan gradually over her lifetime. As distributions from the IRA or retirement plan are taxable income, this deferral of the income over her lifetime was a great benefit.

Under the SECURE Act, this stretch over a beneficiary’s lifetime has been taken away and replaced with a 10-year rule. An individual beneficiary now has only 10 years after your death to fully withdraw your IRA or retirement plan account. This does not mean the beneficiary would need to withdraw one-tenth of your IRA or retirement plan account each year; rather, it means the beneficiary has until the end of the 10-year period following your death to make full withdrawal.

There are four exceptions to the 10-year rule: 

  1. Surviving Spouse. The SECURE Act does not greatly affect the distributions to a surviving spouse. A surviving spouse is exempt from the 10-year rule and may still roll over your IRA or retirement plan and will have other options that were in place before the SECURE Act was passed.
  2. Beneficiaries Not More Than 10 Years Younger. If you name a beneficiary, such as a sibling, who is not more than 10 years younger than you, the beneficiary can still use the stretch over the beneficiary’s lifetime. This exception can also apply to a beneficiary older than you.
  3. Minor Child. Minor children are given a limited stretch under the SECURE Act until they reach the age of majority. This exception only applies to a child so an IRA or retirement plan owner cannot use this exemption for a minor grandchild, niece, or nephew. Although the Internal Revenue Service will need to provide more guidance, the age of majority may include a child up to age 26 if enrolled in a specific course of education. This may allow a child, as beneficiary, to wait 10 more years beyond reaching the age of majority – until age 36 – before having to withdraw the IRA or retirement plan funds.
  4. Disabled and Chronically Ill. Beneficiaries who are either disabled or chronically ill are allowed to stretch the payment over their life expectancy. The Internal Revenue Code defines these terms. If you think you have a disabled or chronically ill beneficiary, you may want to visit with your estate planning attorney as the rules can be complex to qualify for this exception.

The 10-year rule is a big change and may impact distributions if a trust has been named as beneficiary. If a trust was named as the beneficiary of your IRA or retirement plan account, you may want to review this designation with your estate planning attorney.

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