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Covid Columns

Oct. 8, 2020

SECURE Act and CARES Act impact retirement benefits for 2020 and beyond

This recently enacted federal legislation has dramatically changed estate planning for retirement benefits.

Patrick J. Haase

Seltzer Caplan McMahon Vitek


Stephanie S. Downer

Buchalter, APC


Recently enacted federal legislation has dramatically impacted estate planning for retirement benefits for 2020 and beyond. The SECURE Act, signed into law last year, requires most inherited retirement benefits to be withdrawn by a designated beneficiary within 10 years of the plan owner’s death.

Now, the Coronavirus Aid, Relief, and Economic Security Act, aka CARES Act, signed into law on March 27, “suspends” required minimum distributions for tax year 2020 and, under certain circumstances, allows plan owners to withdraw retirement funds to cover health and economic costs as a result of the COVID-19 pandemic.


For more than 30 years, the “stretch IRA” was a key feature of retirement benefit planning. Under prior law, an individual named as a designated beneficiary to a retirement account could leave a plan in its tax-deferred status and withdraw benefits gradually over his or her life expectancy through annual distributions known as required minimum distributions, or RMDs. This life expectancy payout allowed inherited retirement benefits to “stretch” years into the future and, in many cases, provided a tax-deferred wealth transfer vehicle to successive generations. Common retirement plans include an individual retirement account, 401(k) employer plan, 403(b) education employer plan and 457(b) charitable employer plan. Retirement accounts can be classified as “traditional” or “Roth.” With a traditional retirement plan, an employee generally contributes pre-tax dollars, the money grows tax-deferred and withdrawals are taxed as current income to the employee during lifetime or to the designated beneficiary after the employee’s death. With a Roth retirement plan, an employee contributes after-tax dollars, the money grows tax-free, and withdrawals are tax-free to the employee during lifetime or to the designated beneficiary after the employee’s death.

The SECURE Act provides that, in most cases, inherited retirement benefits must be fully withdrawn within 10 years of the plan owner’s death. Also, designated beneficiaries subject to this 10-year payout period are no longer required to take annual RMDs.

The SECURE Act has left in place the “stretch IRA” for a subgroup of designated beneficiaries, known as eligible designated beneficiaries. Eligible designated beneficiaries include:

1) the surviving spouse of the participant,

2) a minor child of the participant (until the minor reaches the age of majority),

3) a disabled beneficiary,

4) a chronically ill individual and

5) a beneficiary less than 10 years younger than the participant.

The SECURE Act also made two changes to the rules governing lifetime minimum distributions: Plan owners can now wait until age 72 to begin withdrawals (an increase from age 70½) and there is no longer an age cap on contributions to traditional IRAs.

SECURE Act Planning Considerations

For most clients, their current estate plans and beneficiary designations will continue to “work,” but such plans may operate much differently than expected. In response to the SECURE Act, estate planners and clients will need to re-think retirement account beneficiary designations.

Eligible Designated Beneficiaries

In all cases, beneficiary designations should be reviewed. Under the SECURE Act, designated beneficiaries more than 10-years younger than the plan owner, excluding eligible designated beneficiaries, are subject to the new 10-year payout period.

Eligible designated beneficiaries can still take advantage of the “stretch IRA” provisions under prior law, subject to annual RMDs. Certain eligible designated beneficiaries, such as chronically ill or disabled persons, may benefit from a see-through trust for purposes of allowing a trustee to make withdrawals and distributions from an inherited retirement account.

Conduit Trusts vs. Accumulation Trusts

There are two types of see-through trusts for retirement benefits: a conduit trust and an accumulation trust. A conduit trust requires all retirement plan withdrawals to be distributed to the trust beneficiary, whereas an accumulation trust allows the trustee to retain withdrawn retirement plan benefits in trust for the benefit of the trust beneficiary.

As a result of the SECURE Act, a beneficiary of a conduit trust must receive the entire retirement account within 10 years. This may result in larger distributions to the beneficiary than originally intended by the plan owner. Therefore, an accumulation trust may be a better option for clients who wish to distribute retirement accounts to a beneficiary for a period longer than 10 years. Retirement plan withdrawals, however, retained in an accumulation trust will be subject to income taxes at trust income tax rates.

Roth Conversion

The new 10-year payout period may result in greater income tax burdens for designated beneficiaries. For this reason, converting a traditional IRA, which consists of pre-tax retirement dollars, to a Roth IRA, which consists of after-tax retirement dollars, may be an attractive option for some clients. Following a Roth IRA conversion, retirement benefits can be withdrawn tax-free by the designated beneficiary. However, before funds can be transferred from a traditional IRA to a Roth IRA, income taxes would need to be paid on the pre-tax dollars of the traditional IRA.

Charitable Remainder Trusts

A creative strategy to “stretch” retirement plan benefits over a designated beneficiary’s lifetime involves transferring a retirement account to a charitable remainder trust. Upon the plan owner’s death, the CRT would then pay a fixed annuity amount or percentage to the beneficiary (subject to income tax) for his or her lifetime. Upon the beneficiary’s death, the remaining balance would be distributed to a charity selected by the plan owner.

Ultimately, the SECURE Act affects each client’s plan differently. In order to identify and address the potential consequences of the SECURE Act, clients and estate planners should undertake an immediate review of all retirement account beneficiary designations. Although some clients may be unaffected by the SECURE Act, other clients will need to make significant changes.


The CARES Act was passed by Congress to help individuals, families and businesses address the health and economic consequences of the COVID-19 pandemic. The CARES Act made temporary, but potentially significant, changes to the rules governing retirement plans for tax year 2020.

The CARES Act suspended RMDs for tax year 2020, thus allowing plan owners and beneficiaries to keep more assets in tax deferred retirement accounts. The CARES Act also provided special tax treatment for coronavirus-related distributions, called CRDs. CRDs must be taken in tax year 2020. For a withdrawal to qualify as a CRD, the plan owner must be either:

1) an individual diagnosed with COVID-19,

2) the individual’s spouse or dependent, or

3) an individual who experiences adverse financial consequences as a result of COVID-19.

CRDs are not subject to the 10% tax on retirement account distributions prior to age 59½. In addition, the plan owner can spread the income from CRD withdrawals over a three-year period, thus mitigating the income tax consequences of CRD withdrawals. Further, and most importantly, CRD withdrawals, and the resulting income tax consequences, can be reversed by re-contributing the funds back into the retirement account (or into a new retirement account) by the end of the three-year period.

While these CARES Act provisions are by no means a cure-all for those experiencing hardship as a result of the COVID-19 pandemic, these provisions do provide some temporary relief for plan owners and their families that otherwise would be unavailable under prior law. 


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