The New SECURE Act

February 12, 2020

In early January, President Trump signed into law the new SECURE Act (“Setting Every Community Up for Retirement Enhancement”) which has many components, several of which could impact divorces.

Annuities: The Act enables employers to offer annuities in their 401(k) plans. The logic behind this is that an annuity can offer the employee a lifetime income stream when they stop working, thus ensuring a more secure retirement.

An annuity is financial product sold by insurance companies. Money invested in the account grows tax-deferred and can be withdrawn after age 59 1/2 without a penalty. Withdrawals can be lump-sum (partial or full withdrawals) or the contract can be “annuitized” which means the entire contract is turned over to the insurer in exchange for guaranteed lifetime income. The problem that may arise in a divorce is that not all annuities are divisible. 

Annuities within a retirement account are called “qualified annuities.” This type of annuity requires a QDRO if it is to be divided. A QDRO cannot award a party any income or annuity benefit that is not available under the terms of the original annuity contract, so if the contract says the annuity cannot be cashed out as a lump-sum, or transferred to an IRA, then a QDRO with those instructions will not be honored. Therefore, it’s important to read the contract to determine if it is possible to break up or transfer the annuity. It is also possible that transferring the annuity to the receiving spouse may start a new surrender period, resulting in penalties if the receiver takes withdrawals before that period is up (which could be as long as 10 years.) Clearly, going forward it is important to ask your client if they hold an annuity within their 401(k) plan (or anywhere else!)

Inherited IRAs: IRAs that are inherited by a non-spouse (in 2020 or later) are now required to be distributed to the beneficiary (the inheritor) within 10 years. Previously the beneficiary could stretch the distributions out over their lifetime. Now the entire account must be withdrawn by the end of year 10. Good tax planning is in order here, to determine the best strategy for withdrawals that will result in the least amount of income tax. Should the account be allowed to grow for 10 years, at which point the entire value is distributed and taxed? Or would equal installments over 10 years make more sense? If the beneficiary will retire within those 10 years there might be a year of little or no income, an ideal time to take a distribution. The more taxes that are imposed the less in after-tax proceeds, and this could impact the ability to pay support.

529 Plans: Qualified withdrawals from 529 college savings plans now include up to $10,000 to pay for student loans. This is a lifetime cap (not annual cap) and applies to the plan beneficiary (the student for whom the plan account was set up). An added benefit is that another $10,000 can be withdrawn for student loans for each of the beneficiary’s siblings. As an example, Marie, age 22, graduates college with $10,000 of student loans and $20,000 left in her 529 plan. She can withdraw $10,000 to pay off her loans and use the remaining $10,000 to pay off her brother Donnie’s loans. This new rule may help your clients who have student loans for more than one child.

There is much more to the SECURE Act, but the areas above may have a direct impact on your divorce cases going forward.

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