Federal Secure Act Makes Significant Changes to Retirement Plan Laws

Beginning January 1, 2020, the federal Secure Act has made very significant changes to laws governing retirement plans.  The key changes are:

  • The year in which you must begin taking Required Minimum Distributions (RMDs) from your retirement plans has increased to age 72 from age 70 ½. The change applies to anyone who has not reached age 70 ½ by 12/31/19, and has not started their RMDs.
  • There is no longer an age cap on contributions to traditional IRAs. You can continue to contribute if you are working even if you are over 70 ½.
  • Annuities now permitted within 401k plans
  • Most important for planning purposes, the law eliminates the so-called “stretch” payout for Required Minimum Distributions to most beneficiaries after the death of the plan owner. Most beneficiaries will be required to withdraw the entire retirement plan account by December 31st of the year 10 years after the year of death of the plan owner.  Exceptions apply if the named beneficiary is: (1) the spouse; (2) a minor child; (3) disabled; (4) chronically ill; or (5) not more than 10 years younger than the plan owner. 

The changes implemented by the Secure Act are generally intended to require distribution of retirement plan accounts far more quickly following the death of the plan owner, which means that income taxes paid on these funds will have to be paid far sooner than under previous law.  For those with larger retirement plans, and particularly those who have left portions of those plans to any sort of trust, we recommend you consult with your attorney and/or your tax professional to understand the impact of the Secure Act on your plan and consider possible options.

Changes to federal and state estate tax exemption amounts

For 2020, the federal estate tax exemption amount has increased to $11.58 million, and the Maine estate tax exemption amount has increased to $5.8 million. The federal estate tax rate after $11.58 million is 40% and the Maine estate tax rate begins at 8% after $5.8 million, increases to 10% after $8.8 million and increases to the highest rate of 12% after $11.8 million.  Any bequests or gifts to spouses or non-profit charitable organizations are not subject to gift or estate taxation.  The federal annual gift tax exclusion amount remains at $15,000 per person per year.  The increases in federal and state estate tax exclusion amounts are a result of cost of living adjustments built into the applicable laws, not due to legislative changes.  That said, we do anticipate that estate tax laws may change again in the near future, especially at the State level.