The most significant action of Congress in 2019 relating to retirement and estate planning was the late December passage of the “Setting Every Community Up for Retirement Enhancement Act of 2019”, commonly known as the “Secure Act”. It was signed into law shortly thereafter and is effective January 1, 2020, for most purposes.
In this and future newsletters, we will look into the provisions of the Secure Act and also some strategies to maximize benefits and minimize problems created by this new law. The Secure Act is also one of the topics our 2020 series of free client workshops. Registration information for these workshops can be found here.
In this article, we will examine some basics provisions of the new Secure Act.
First some good news in the new law:
The Secure Act pushes back the age at which you must start taking withdrawals from your IRA or retirement plan. For many years it was age 70½, but under the Secure Act it is age 72. This is a good change because it allows you to keep money in your plan longer and by doing so your account will continue with its tax-deferred growth.
Note: The law did not change the age at which you can start making penalty-free withdraws from IRAs and other retirement plans. That age remains at 59. However, there are also a limited number of other exceptions that allow for penalty-free withdrawals before age 59. Make sure you consult with an expert on these issues before making such withdrawals.
The Secure Act for the first time allows individuals to continue to contribute to a traditional IRA past age 70½ if you have income from employment rather than from investments or other passive income. Again, this is a good change especially since many baby boomers are continuing to work past traditional retirement ages.
Now some bad news in the new law:
The Secure accelerates the timing of when most beneficiaries must take distributions from IRAs or retirement plans after the original owner dies. For many beneficiaries, the only two options for withdrawal are either immediate or essentially within ten years of the prior owner’s death. For most, there is no longer the old “five year rule” nor the ability to defer distributions based upon the age of the new owner commonly referred to as the “stretch” or “inherited” ‘IRA. These changes don’t necessarily increase the tax to be paid, but it does mean taxes will likely have to be paid sooner in most circumstances.
In short, under the Secure Act, most people designated as beneficiaries of IRAs and retirement plans of people dying in 2020 onward must take all distributions from the plan by the end of the 10th year after the death of the prior owner.
As with many laws passed by Congress, there are a number or wrinkles and exceptions. For instance, some beneficiaries considered to be “eligible” beneficiaries are not subject to the 10-year rule, and the old rules continue to apply to them. Eligible beneficiaries are:
- The spouse of the original owner. Just like under the old rules, the spouse can take it as an inherited IRA using their own life expectancy or can choose to roll it over into their own IRA.
- A child of the original owner under the age of majority (typically 18). There are two caveats here. First, it must be a child of the original owner, not just any minor child. Second, once the child reaches the age of majority, the 10-year rule applies at that time.
- A person who is medically disabled or chronically ill.
- A person who is less than 10 years younger than the Participant.
How do these law changes affect you?
If you are the owner of an IRA or retirement account, during your own lifetime, you don’t have to start taking distributions until age 72, rather than age 70 ½. Otherwise, you’ll take distributions according to the same schedule as in the past, based on the IRS’s “Uniform Table” which considers your life expectancy (and the life expectancy of another person 10 years younger than you).
Your beneficiaries may be required to pull out retirement plan benefits over a 10-year period (unless they fit in one of the exceptions above). In other words, they won’t get as much of an income tax deferral as in the past. This means your beneficiaries will be required to pay the income tax due on the assets (if any) faster than in the past. It doesn’t necessarily increase the tax they’ll owe, but it means they’ll owe it sooner.
Stay tuned for more updates on this significant new law. To attend a free workshop in March 2020 on the new law, registration information can be found here. You can also contact our firm to request a subscription to our monthly E-Newsletter, where future free workshops as well as other important information is announced.