The SECURE Act of 2019
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law. The SECURE Act became effective on January 1, 2020 and includes policy changes that, amongst other things, will significantly impact retirement accounts. Below are a few of the highlights…
Increase in Triggering Age for Required Minimum Distributions (RMDs)
The SECURE ACT increases the age that triggers RMDs from 70½ to 72. Under the previous law individuals had to start taking RMDs no later than April 1 of the year following the year that they turned 70½. Under the new law, you can postpone RMDs to April 1 of the year following the year that you turn 72. The delay in RMDs enables individual retirement account (IRA) owners to postpone withdrawals for an additional time resulting in greater deferral of income tax. It is important to note if you turned 70½ in 2019, you will still need to take your RMD for 2019 (no later than April 1, 2020). If you are currently receiving an RMD (or should be) because you are over age 70½, you must continue to take your RMD. Only those who turn 70½ in 2020 (or later) may wait until age 72 to begin taking RMDs.
“Stretch” IRAs Will be Limited
Most non-spouse beneficiaries of an IRA will now be required to receive distributions of all assets from the original account owner’s IRA within 10 years of the original account owner’s death. Under the previous law, a beneficiary would be able to “stretch” the distributions from the deceased account owner’s IRA over the course of his or her life expectancy by rolling the original owner’s IRA into an “Inherited IRA”. RMDs from an Inherited IRA were calculated based on the beneficiary’s age. As such, a younger beneficiary would have much smaller RMD requirements. For example, a 40 year old beneficiary of an IRA (whose life expectancy is an additional 43.6 years according to the IRS Single Life Expectancy Table) would only be required to withdraw 2.29% (1/43.6) of the original account holder’s IRA in the first year. As time goes on the distributions would increase, but the entire amount could be withdrawn slowly over the beneficiary’s entire life. Under the new rule, the beneficiary can still roll the original account holder’s IRA into the beneficiary’s Inherited IRA, but entire account must be withdrawn within 10 years of the original account holder’s death (as opposed to the approximately 44 years in the above example). The acceleration in RMDs results in the expediting of tax payments and the loss of the ability to defer income taxes.
In addition to spouses, the new 10 year distribution rule does not apply to a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent. It also does not apply to beneficiaries of IRA owners who died prior to January 1, 2020. Anyone who inherited an IRA from an original account owner who passed away prior to January 1, 2020 can continue their current distribution schedule.
Elimination of Age Limit for Contributions to an IRA
Under previous law, an individual who was over age 70½ was no longer eligible to contribute to an IRA. Under the new rules, the age limit is eliminated. Individuals can contribute to their IRA as long as they are working and have earned income.
Birth or Adoption of a Child
According to the new law, an individual will now be permitted to take a “qualified birth or adoption distribution” of up to $5,000 from an eligible defined contribution plan or IRA without an early withdrawal penalty.
The SECURE Act has expanded the definition of what constitutes a qualified distribution from a 529 plan. One of the biggest concerns about using a 529 plan are the penalties incurred in getting money back out of the 529 plan in the event that one is unable to use the entire account to for qualified expenses. Under the new law, student loan payments of up to $10,000 (lifetime, not per year) are now considered qualified distributions.
The SECURE Act of 2019 has positive and negative changes that impact tax, estate and retirement planning for most individuals who have retirement accounts. As with any significant change in the tax law, it is important to consult with your accountant, attorney and financial professional to learn how the legislation impacts you and your family. We are happy to address questions you have concerning the SECURE Act of 2019 or any of your other planning needs.