It’s no secret that the US retirement system is in desperate need of an update. After all, according to data from the U.S. Bureau of Labor Statistics, only 56% percent of US workers participate in any kind of workplace retirement plan. That means that of the more than 165 million adults who make up the workforce, more than 70 million are woefully ill-prepared for retirement (and even those who do participate in a workplace plan tend to be behind). In large part, this is because employers shy away from providing expensive and difficult-to-administer 401(k) plans. The Setting Every Community Up for Retirement (or SECURE) Act changes this.
What the Act Means for Employers
- The SECURE Act sees the cap under which small businesses can automatically enroll workers in “safe harbor” retirement plans jump to 15% of wages, thereby giving a significant boost to employees’ retirement security.
- Employers may now receive a maximum tax credit of $500 per year in exchange for creating a 401(k) or Simple IRA plan with automatic enrollment.
- Part-time employees who either work 1,000 hours throughout the year or those who have accumulated 500 yearly hours for 3 consecutive years may be signed up for their employer’s 401(k) plan.
These changes go far in addressing the national retirement plan crisis. They are but the tip of the iceberg for US retirees, however. While the SECURE act makes it easier for employers to offer retirement plans, the effect on citizens working to plan their retirement is mixed—at least where estate planning is concerned.
Provisions that Impact Your Estate Plan
- The SECURE Act removes the age limit for making Traditional IRA contributions, meaning that those who choose to work past the age of 70 may contribute to their IRA indefinitely.
- The required beginning date for required minimum distributions (RMDs) is increased from 70.5 years old to 72 years old meaning individuals can keep money in their IRAs for longer and put off paying taxes on funds until they are truly needed.
- Most importantly, the SECURE Act requires beneficiaries to withdraw funds from an inherited IRA within ten years of the original account holder’s death (so long as the death occurred after December 31, 2019), effectively eliminating conduit trusts and stretch-out IRA trusts for all but a limited number of beneficiaries (more on those exceptions later).
These provisions mean that stretch IRAs—a term used to describe a common estate planning technique in which a beneficiary extends distributions from an inherited IRA over his or her lifetime, thereby spreading out the payment of income taxes over a longer period—are effectively eliminated. While estate planning attorneys are already hard at work designing workarounds, this is nonetheless a significant complication.
Working Around the SECURE Act
- A standalone retirement trust (with an accumulation provision) is a mechanism that allows the trustee to accumulate required distributions in a trust instead of receiving them directly, thereby achieving a result similar to that offered by the now-defunct stretch strategy.
- An irrevocable life insurance trust (ILIT) likewise serves as a workaround by permitting the trustee discretion concerning how and when distributions are made. Besides, life insurance allows for the addition of cash to the gross estate thereby offsetting the accelerated income tax liability implied by the SECURE Act.
- A charitable remainder trust is a final mechanism that may be of interest to the charitably inclined. While this avenue naturally means that beneficiaries receive less, it is nonetheless an excellent way to protect assets that would otherwise be lost to taxes.
As mentioned above, certain beneficiaries are exempt from the consequences of the SECURE Act. These include a living spouse, minor child, disabled individual, or chronically ill individual. Unfortunately, these groups only account for a sliver of the affected population.
Whether you are a person with an estate plan designed to take advantage of the now-defunct stretch-IRA strategy or simply someone investigating estate planning options, an experienced estate planning attorney is your best resource for fully understanding the changes addressed in this article. That, and they are the people to turn to for estate planning, in general—something every adult should think about, especially given the still-escalating Covid-19 pandemic.