The Gray Divorce Podcast: Episode 35 Important Retirement Plan Changes: The Implications for Late Life Divorce

Andrew Hatherley |

The SECURE Act 2.0 was passed at the end of 2022 as an expansion of the first SECURE Act which was passed in 2019.  

While the SECURE Act is not specifically directed at divorcing people, the changes it institutes will have a big impact on divorcing people with respect to retirement accounts.  

It’s important that divorcing parties and their attorneys understand this piece of legislation and its effect on retirement plans so as to better arrive at a fair settlement agreement in divorce. 

The SECURE Act 2.0’s changes began to go into effect in 2023. Others have just gone into effect at the beginning of 2024 and other changes will be realized in 2025 and 2026. 

One of the key pieces of the legislation that went into effect in 2023 was the change in the age at which required minimum distributions need to be taken from your IRA or retirement plan. Previously the age at which you needed to start taking your RMD was age 72. That has been increased to age 73. For those of you who were born in 1960 or later your RMD begins when you turn age 75. 

These changes benefit divorcees in that they give you more time for retirement investments to grow tax-deferred. There is a potential benefit here of more time to implement tax planning strategies like Roth conversions, harvest capital gains, and accelerate taxable distributions before RMDs begin. 

Another important aspect of the SECURE Act which may impact financial planning of divorcing individuals is the elimination of what was called the “Stretch IRA”. With the old rule, the non-spouse beneficiary of an IRA was able to stretch required minimum distributions over their lifetime. Under the new rules, non-spouse beneficiaries who inherit an IRA or qualified retirement plan are required to withdraw all assets from the inherited account within 10 years. Notable exceptions to this ten-year rule are, once again, a surviving spouse, but also minor children, disabled or chronically ill beneficiaries, or if the beneficiary is not more than 10 years younger than the IRA or retirement plan owner. 

It's important to consider the tax consequences of taking distributions in 10 years. If you have earned income already you may be bumped into a higher tax bracket. You also want to be careful not to ignore the 10-year rule for nine years and then end up with a huge tax bill in the 10th year. 

That's why it's important that you be aware of this new distribution rule and discuss with your tax person and financial advisor the payout time frame and potential tax liability. 

One provision of the SECURE Act that just came into effect this year, 2024, is more relevant than most to some people going through divorce. That is the provision that if you have been the victim of domestic abuse and you need to access money in your retirement plan you now may be eligible to do so penalty-free up to $10,000 or 50% of your vested balance, whichever is less. Many of us know that having access to funds is very important, particularly in the initial stages of divorce and I could see this provision as potentially being very helpful to some people who may need legal counsel or just to move away from a difficult situation. The SECURE Act also makes it possible to access up to $1,000 penalty-free from your IRA or retirement plan for emergency expenses. There are limitations on this and of course, taxes do still apply to the distribution. 

Some other new wrinkles in the SECURE Act include: 

  • It increases the availability of annuities in employer retirement plans. In some instances, an annuity cannot be divided between spouses.  It is likely that the inclusion of annuities in 401(k) plans will complicate retirement asset division in divorce. 
  • Effective in 2024, it permits individuals to roll over extra funds in a 529 plan to a beneficiary’s Roth IRA, if they have earned income. Many older divorcing individuals may be in a situation where they saved money for a child in a 529 plan and those funds weren't used for college or funds were left over. This provision opens financial planning opportunities and should be considered in marital settlement discussions.  
  • The SECURE Act allows 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. Previously, a lower-earning spouse who may be at home with the kids (but working part-time) might have been presumed as not contributing to an employer-sponsored retirement plan. Well, that may no longer be the case. 

Download the checklist of the issues covered in the SECURE Act here.