Often times in a divorce matter, the two biggest assets the parties have are their house and retirement accounts. While everyone was busy with the recent holiday rush, President Trump signed the SECURE Act into law as part of the government’s spending bill. The SECURE Act takes effect on January 1, 2020, and makes important changes to retirement savings. While not a law directed specifically to divorcing spouses, it is important to understand the changes the SECURE Act has made given that retirement accounts are a significant consideration in most divorce matters. Some of the most important changes the SECURE Act made are as follows.
The SECURE Act now allows for annuities to be included as 401(k) investments. Annuities can be complex investments with many different moving parts. In some instances, an annuity cannot be divided between spouses. The inclusion of annuities in 401(k) plans will likely complicate the division of retirement assets in the context of a divorce.
The SECURE Act also increases the age for required minimum distributions (RMD) for qualified retirement plans. Previously, RMDs were to begin in the year in which the account holder turned 70.5. The SECURE Act has increased the RMD age to 72. The change to the RMD age can have tax implications for couples going through a divorce as well as impact support and asset division.
Under the SECURE Act, “stretch IRAs” have been eliminated. Previously, in some cases, distributions from an IRA not inherited from a husband or wife could be stretched over the lifetime of the beneficiary. Now, assets of an inherited account must be withdrawn within ten (10) years. This can be particularly problematic for beneficiaries who are in their highest earning years when the distribution is required to be made as their tax burden will be increased. Inherited assets are always relevant within the context of a divorce, so understanding the payout time frame and potential tax liability related to such an asset is important.
Finally, the SECURE Act allows for part-time workers to participate in employer-sponsored retirement plans by reducing the minimum number of hours required to be worked to participate in the plan. Under the SECURE Act, an employee need only work 1,000 hours in one year, or 500 hours in three consecutive years to be eligible to participate in an employer-sponsored retirement plan. This is significant in the context of a divorce because where previously the lower-earning spouse, who may stay home with the children, but work part-time, would have been presumed to not be contributing to an employer-sponsored retirement plan, this may no longer be the case.
It remains to be seen whether the goal of the SECURE Act, to strengthen retirement security across the country, will be met, but in the meantime, it is important to understand the changes that were made, whether divorcing or not. Happy New Year!