On December 20, 2019, the new SECURE Act was signed into law by President Trump. SECURE is an acronym for “Setting Every Community Up for retirement Enhancement.”
The SECURE Act contains over six hundred pages and has 29 major provisions. Most of these provisions affect company-sponsored retirement plans (e.g. pensions, profit-sharing plans, etc.). However, in this paper, we will concentrate on the provisions of the SECURE Act that affect people who own Individual Retirement Accounts (IRAs).
The biggest impact of the SECURE Act for IRA owners appears to us to be:
- Changes in the inherited IRA distributions;
- Changes in the IRA Required Minimum Distributions (RMDs).
- Changes in the IRA contributions.
Changes in the Inherited IRA Distributions
Before the SECURE Act, IRA beneficiaries (both human beings and certain trusts) were eligible to stretch their inherited IRA distributions over their life expectancy. By stretching their inherited IRA distributions, they were potentially able to minimize their taxes and maximize their returns.
However, under the SECURE Act, many designated beneficiaries who inherit IRAs in 2020 and beyond will be subject to a new “10 Year Rule”.
Under this new rule, inherited IRAs must be completely emptied by the end of the 10th year following the year of inheritance. However, in the years prior to the 10th year, there are no Required Minimum Distributions.
Fortunately, there are certain categories of “Eligible Beneficiaries” to which the new 10 Year Rule will not apply. These categories are:
- Spousal beneficiaries;
- Chronically ill beneficiaries as defined under Internal Revenue Code Section 7702B(c)(2);
- Disabled beneficiaries as defined under Internal Revenue Code Section 72(m)(7);
- Individuals who are not more than 10 years younger than the decedent;
- Minor children of the original IRA owner, but only until those children reach the age of majority (age 18 in most states).
With these Eligible Beneficiaries, the same rules that applied to them prior to the SECURE Act will apply to them after the SECURE Act.
Changes in the IRA Required Minimum Distributions (RMDs).
Prior to the SECURE Act, traditional IRA owners were required to begin taking distributions from their IRAs no later than April 1 of the year following the year the IRA owner turned age 70½.
The SECURE Act changes the required beginning date for RMDs from age 70½ to age 72. In addition, IRA owners at age 72 can delay their first RMD until April 1 of the following year. However, if the first RMD is not taken in the year an individual turns age 72, but is taken the following year by April 1, a second RMD will have to be distributed that year.
As before, the amount of the IRA owner’s RMD is determined by dividing the IRA account balance at the end of the prior year by the divisor listed in the IRS’s Uniform Lifetime Table. Separate from the SECURE Act, the IRS has been given the green light to update the life expectancy tables used for RMD calculations. The RMD divisor will be slightly increased beginning in 2021, which will slightly reduce the amount of each year’s RMD.
These new rules apply to IRA owners who turn age 70½ after December 31, 2019.
Changes in the IRA Contribution Rules
Prior to the SECURE Act, individuals were prohibited from making additional IRA contributions once they reached the year in which they turned age 70½. However, after beginning January 1, 2020, individuals of any age can contribute to traditional IRAs, assuming they have earned income.
Retirement Planning Opportunities
What do these changes mean for retirees? The changes make IRAs a more flexible tool for retirement saving and a less effective tool for wealth transfer or estate planning.
A few things to consider:
- Roth conversions could be valuable for retirees with a goal of leaving a legacy since inherited IRAs will be less tax efficient.
- Anyone who is a non-spouse beneficiary of an IRA will need a tax-efficient plan to withdraw all the inherited IRA funds within 10 years.
- All estate plans should be reviewed considering these changes, especially anyone leaving an IRA to a trust.
Give us a call if you would like to schedule a meeting to discuss what the SECURE Act means to your situation.