In December 2019, Congress finally passed the SECURE Act impacting qualified retirement plans maintained by employers and individual retirement accounts. Some changes include:

1. “Stretch” payouts are not available for most beneficiaries. Prior planning for most non-spousal beneficiaries will not function in the same way it would have last year.
2. Taxpayers born after June 30, 1949 do not have to take their Required Minimum Distributions (RMDs) until they reach 72. Before SECURE, RMDs had to start in the year in which the taxpayer reached 70 ½.
3. Taxpayers may contribute to a deductible IRA regardless of age. Under the old regime, contributions after the taxpayer reached 70 ½ were prohibited.
4. Penalty-free withdrawals up to $5,000 are allowed for the birth or adoption of a child.

For many taxpayers, the beneficiary of an IRA or qualified retirement plan is a spouse. Under the new rules, a spouse may continue to receive payouts over their life expectancy. So too for a minor child of a taxpayer, disabled or chronically ill beneficiaries, or beneficiaries less than 10 years younger than the taxpayer (this group is referred to as the “eligible designated beneficiaries”).

The rights and abilities of a spouse inheriting an IRA are relatively unchanged by the SECURE Act. A spouse who inherits may: receive payouts over the life expectancy of their deceased spouse; elect to treat the inherited IRA as their own; use a conduit trust or a combination QTIP-conduit trust in which the surviving spouse receives the greater of the RMD or the trust income.

While minor children are given favorable payouts, their preferred status won’t last forever. Once the minor reaches the age of majority, the entire value of the account must be paid out within 10 years. Planning for minors therefore presents a difficult dilemma—acceleration of taxes or the acceleration control of the money in the hands of the minor.

There are specific tests built into the law for an individual to qualify as disabled or chronically ill. (Receiving Social Security Disability benefits is a good indicator of meeting the standard.) If an individual is disabled or chronically ill at the death of the plan participant, they are entitled to life expectancy payout. If an individual becomes disabled or chronically ill after the participant’s death, this preferred status is not available. Be careful—leaving an IRA directly to a disabled beneficiary may seem like a great idea for tax purposes, but there are special considerations to be sure that the beneficiary doesn’t lose public benefits as the result of their inheritance. It is possible to use one intended beneficiary’s status as disabled to achieve life expectancy payout using a trust even if the trust has other remainder non-disabled beneficiaries.

What about everyone else? For those taxpayers who have designated anyone other than one of the five categories above as the beneficiary (such as their children or certain “see through” trusts), the inheritor is facing a 10-year payout. This means all the money in the inherited IRA must be paid out (and income taxes paid on that money) by December 31st of the year containing the 10th anniversary of the taxpayer’s death. No payments are required to be made during that 10-year period. Either way, the beneficiary is taxed on the amount withdrawn, increasing the total amount of taxes payed compared to the old regime. This payout will cause an increase in the total amount taxed and could push an inheritor into a higher tax bracket due to the additional income. There may be other options available for those inheriting an account after the RMDs have started.

Under both the old rules and the new, qualified money left to an estate, charity, and certain “non see through trusts” must still be withdrawn five years after the death of the plan participant.

If your existing plan involves an IRA passing through a trust, it will continue to work, but not in the way you may have intended. Whether you’re using a trust or not–and especially important to consider if your plan includes disabled or non-spousal beneficiaries–you should meet with your estate planning lawyer to discuss options for minimizing taxes and maximizing protections for any type of beneficiary.

Retirement plans are often an important part of estate planning. Even if your plan for retirement benefits consists of having everything go to your spouse, there is still the need to consider what would happen after the death of your spouse. More so, if this arrangement includes “stretching” benefits for children and/or grandchildren, with these new rules in place, revisiting your current plan is essential.