The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), passed by Congress and signed into law by former Pres. Trump in 2019, includes provisions that impact retirement and estate planning. Revisions to the SECURE Act, referred to as “SECURE Act 2.0,” took effect in 2023 and made significant modifications that could change how Americans approach financial decisions around retirement and estate planning.
The original SECURE Act eliminated the “lifetime stretch” for most beneficiaries of individual retirement plans, or IRAs. Previously, an IRA beneficiary could take distributions from the account over their own life expectancy. The SECURE Act said only certain beneficiaries are now eligible for that lifetime stretch, including spouses, disabled or chronically ill people, the minor children of the IRA’s owner and people no less than 10 years younger than the owner. Everyone else must withdraw the entire inherited IRA within 10 years.
However, the SECURE Act was silent on whether the 10-year payout rule required distributions be made on an annual basis. SECURE Act 2.0 clarifies that the 10-year payout rule carries a required minimum distribution each year and that the remaining funds be paid out in full by the 10th year.
These limitations only apply to IRAs inherited in 2020 or later.
Required Minimum Distribution (RMD) Age Increase
The SECURE Act, as originally passed, pushed back the age for when retirement plan participants must take required minimum distributions from 70½ to 72. Under SECURE Act 2.0, that age is pushed to 73. For people aged 64 or younger, that age increases to 75 starting in 2033. In addition, the penalty for failing to take RMDs as required has decreased.
The benefit to this RMD age change is that people can keep their money in their retirement accounts longer. This allows for longer-term financial planning and more opportunities to grow the account without incurring taxes on withdrawals.
Qualified Charitable Distributions
A charitable remainder trust is an irrevocable trust that can generate both an income stream to the trust holder (the donor) as well as other beneficiaries to allow for charitable giving during the donor’s lifetime. Anything remaining after the donor’s death goes to a designated charity or charities.
Previously, the limit on qualified charitable distributions was capped at $100,000. Under SECURE Act 2.0, the limit will be indexed for annual inflation beginning in 2024. SECURE Act 2.0 also allows for a one-time qualified charitable distribution of up to $50,000 directly from an IRA into a charitable remainder trust.
529 Plan Options
A 529 plan is an investment account set up exclusively to pay the qualified education expenses for a designated beneficiary. These accounts, which offer tax benefits, are often set up by parents or grandparents to help children or grandchildren pay for college. A major drawback to these plans is the taxes on withdrawals of any unused portions of the account. Starting in 2024, SECURE Act 2.0 will allow 529 plan owners to transfer up to $35,000 in unused funds from a 529 plan that is at least 15 years old to a Roth IRA in the beneficiary’s name. This allows children or grandchildren who don’t use their full 529 plan to get a jumpstart on retirement savings.
Other Changes Under SECURE Act 2.0
The above are just some of the ways SECURE Act 2.0 can impact retirement and estate planning. Other provisions impact IRA catch-up contribution limits, Roth 401(k) required minimum distributions and employer matching contributions for student loan debts.