SECURE 2.0 Act: How It Affects You and Your Retirement Account Beneficiaries

On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act). This new legislation builds on the original SECURE Act of 2020, which introduced significant changes to retirement planning. Here’s what you need to know about the impact of both Acts on your retirement accounts and beneficiaries.

 Key Changes from the Original SECURE Act

The original SECURE Act of 2020 introduced several important changes, including:

• – Increasing the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70 ½ to 72 years of age.
• – Removing the age restriction for contributions to qualified retirement accounts.
• – Mandating that most designated beneficiaries withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death.

 Eligible Designated Beneficiaries Exempt from the 10-Year Rule

Certain beneficiaries are exempt from the 10-year withdrawal rule, including:

• – Spouses
• – Beneficiaries who are not more than 10 years younger than the account owner
• – The account owner’s children who have not reached the age of majority
• – Disabled individuals and chronically ill individuals

 New Provisions in the SECURE 2.0 Act

The SECURE 2.0 Act introduces several enhancements and clarifications to the original legislation. Some of the key changes are:

• – Raising the RBD age for RMDs to 73 in 2023 and 75 by 2033.
• – Reducing penalties for failing to take RMDs to 25% of the RMD amount, and to 10% for IRAs if corrected timely.
• – Automatically enrolling employees in 401(k) and 403(b) plans, with an opt-out option within 90 days.
• – Allowing higher catch-up contributions for participants over 50 ($7,500 in 2023).
• – Providing more flexibility in annuity payments from qualified retirement plans.
• – Permitting early distributions for long-term care contracts without penalty.
• – Allowing qualified charities to be named as remainder beneficiaries after the death of a disabled or chronically ill beneficiary without disqualifying the trust as a see-through trust.
• – Enabling plan sponsors to match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective 2024.
• – Allowing 529 plans maintained for at least 15 years to be rolled over into a Roth IRA with a $35,000 lifetime limit, effective 2024.

 Exceptions to the Early Distribution Rule

The SECURE 2.0 Act also provides exceptions to the 10% early distribution excise tax, including:

• – Qualified births and adoption expenses
• – Terminal illness
• – Federally declared disasters
• – Emergency personal expenses
• – Domestic abuse victims

These new provisions may affect your retirement planning decisions and impact your intended beneficiaries.

 Reviewing Your Estate Planning

With the changes brought by the SECURE Acts, it’s crucial to review your estate planning strategies. Here are some steps to consider:

 Revise Your Revocable Living Trust or Standalone Retirement Trust

If your trust includes a conduit provision, requiring immediate distribution of retirement account funds to beneficiaries, this might no longer be the best option. The 10-year rule can create tax burdens for your beneficiaries. An accumulation trust could be a better alternative, allowing the trustee to hold distributions in trust for your beneficiaries.

 Consider Additional Trusts

For many, retirement accounts are among the largest assets owned at death. Creating a trust specifically for your retirement accounts can address the mandatory 10-year withdrawal rule while protecting a beneficiary’s inheritance from creditors, lawsuits, and divorcing spouses. Special needs or supplemental needs trusts may be appropriate for beneficiaries with disabilities or chronic illnesses, exempting them from the 10-year payout rule.

 Review Intended Beneficiaries

Ensure that your beneficiary designations are up-to-date, especially if you have experienced significant life changes like marriage or divorce. Accurate beneficiary designations are crucial for ensuring your retirement accounts are distributed according to your wishes.

 Other Strategies

The SECURE 2.0 Act might change how we think about retirement accounts. If you have charitable inclinations, consider using your retirement accounts to fulfill these goals. A charitable remainder trust can provide income streams while offering tax advantages. Distributing retirement assets directly to a charity can also be tax-efficient.

Given the potential tax impacts and the changes to beneficiary rules, it’s essential to reassess your estate planning. Schedule an appointment with us to discuss how the SECURE Acts affect your retirement accounts and how we can help protect your family’s future.

Contact us today at (949) 334-7823 to ensure your estate plan is aligned with the latest laws and your long-term goals.