A new bill signed by President Trump makes major changes to retirement plans for teachers. The new law is designed to provide more incentives to save for retirement, but it may require workers to rethink some of their planning. 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changes the law surrounding retirement plans in several ways:

Stretch IRAS

The biggest change eliminates “stretch” IRAs. Under the previous law, if you named anyone other than a spouse as the beneficiary of your IRA, the beneficiary could choose to take distributions over his or her lifetime and to pass what is left onto future generations (called the “stretch” option).

The required minimum distributions were calculated based on the beneficiary’s life expectancy. This allowed the money to grow tax-deferred over the beneficiary’s life and be passed on to his or her own beneficiaries.

The SECURE Act requires non-spouse beneficiaries of an IRA to withdraw all the money in the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals would occur during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision will apply to those who inherit IRAs starting on January 1, 2020. 

Required minimum distributions

Under prior law, you have to begin taking distributions from your IRAs beginning when you reach age 70 ½. Under the new law, individuals who are not 70 ½ at the end of 2019 can now wait until age 72 to begin taking distributions.

Contributions 

The new law allows workers to continue contributing to an IRA after age 70 ½, which is the same as rules for 401(k)s and Roth IRAs.

Employers

The tax credit businesses get for starting a retirement plan is increased, and the new law makes it easier for small businesses to join multiple-employer plans.

Annuities

The newly enacted legislation removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.

Withdrawals

The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances. 

What Does this New Rule mean?

Given these changes, workers need to reevaluate their estate plans immediately. Some people have used stretch IRAs to pass assets to their children and grandchildren as an estate planning tool.

One way of doing this has been to name a trust as the IRA’s beneficiary, and these trusts may have to be reformed to conform to the new rules. If a stretch IRA is part of your estate plan, consult with your attorney to determine if you need to make changes.

Speak with a Roth IRA expert at National Educational Services if you have questions about this new rule.