Understanding the SECURE Act and Trusts for Retirement Plans with Tim Hayes
By Tim Hayes, Financial Advisor & MA Public Employee Specialist
To allow non-spouse beneficiaries to withdraw over their lifetime while protecting the retirement account (401k, 403b, IRA) from creditors, many attorneys recommended people name a Trust as the primary or contingent beneficiary of a retirement plan.
That way, non-spouse beneficiaries could withdraw money from an inherited retirement plan based on their life expectancy. Doing this spread the tax liability over an extended period and protected them from creditors if the beneficiary was in a Trust.
The SECURE Act
Signed into law in December 2019, the SECURE Act calls into question the benefit of doing this, especially if the Trust provides income for children or grandchildren.
The SECURE Act does not impact spouses. They can still withdraw money based on their life expectancy, starting when their deceased spouse reaches the required beginning date, now 72 (Age 73 Now). If they prefer, spouses can transfer the IRA, 403b, or 401k into their own IRA.
Non-spouse beneficiaries who are ten years younger than the IRA owner must now withdraw all the money within ten years. However, they are not required to withdraw each year (after they reach adulthood, minor children are required to withdraw in ten years).
The IRS clarified that if the deceased IRA owner was taking required minimum distributions (RMDs), the beneficiary was also required to take them during the 10-year period based on the beneficiary’s age. If the deceased owner wasn’t taking their RMDs, the benficiary didn’t need to take them each year during that ten-year period.
COVID-19 Complicated Things
The law went into effect in 2020. Because of COVID-19, some people have not met with their attorney to review the new law and change the Trust or the retirement plan’s beneficiaries. (For governmental retirement programs, 403b and 457, the law goes into effect in 2022.)
Trusts for retirement plan owners who died before 2020 can use the old law and remain useful planning tools. But unless the new law changes, there appears to be little benefit of naming a Trust as the beneficiary on a retirement account.
A simple solution is to replace the Trust as beneficiary and name new beneficiaries on the plan. You can usually download a form or get it from your financial advisor or plan administrator. If you are married, you could make your spouse the primary beneficiary and your children and grandchildren contingent beneficiaries.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.
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