The SECURE Act Makes Changes to IRAs and Retirement Plans

Signed into law on December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act makes major changes to IRAs and retirement plans. Here are a few changes that may affect your retirement planning.

The age limit for contributing to a traditional IRA is repealed. Prior to 2020, individuals age 70½ or older were not allowed to contribute to traditional IRAs. The new law removes the age limit, making it possible for individuals in their seventies and beyond who work and earn taxable compensation (or who file jointly and have a spouse who works) to contribute to traditional IRAs.

The RMD start age is increased to 72. Owners for most types of retirement accounts, such as traditional IRAs and 401(k) accounts, generally must take required minimum distributions (RMDs) every year starting at a certain age. The SECURE Act increases the age when RMDs must start from 70½ to 72. The change applies to those who reach 72½ after December 31, 2019. Keep in mind that your employer’s non-IRA retirement plan may allow you to delay the start of RMDs past age 72 if you are still working.

Penalty-free withdrawals for birth or adoption of a child. Withdrawals from an IRA or a retirement plan, such as a 401(k) plan, before age 59½ are generally subject to a 10% early withdrawal penalty unless an exception to the penalty applies. The SECURE Act creates a new exception that allows you to withdraw up to $5,000 penalty-free upon the birth or adoption of a child. The Act also gives you the option to recontribute the amount.

The distribution period for inherited retirement accounts is shortened for non-spouse beneficiaries. The SECURE Act shortens the distribution period for inherited IRAs, 401(k) plans, and other defined contribution plans to 10 years for most non-spouse beneficiaries. Prior to the new law, a non-spouse beneficiary generally had the option to stretch annual distributions from the inherited account over their life expectancy. Now, if the account owner passes away after December 31, 2019, the entire account generally must be distributed within 10 years of the death.

Not everyone is subject to the new 10-year distribution requirement. The new requirement does not apply to:
• Surviving spouses
• Minor children until they reach the age of majority
• Disabled or chronically ill individuals
• Individuals who are not more than 10 years younger than the deceased account owner

For any other beneficiary who inherits an account from someone who dies after 2019, the account must be emptied within 10 years. This means that the inherited assets have 10 years at most to potentially compound tax-deferred, or tax-free in the case of a Roth account, before they must be withdrawn. It may also mean higher taxes for the beneficiary in some situations.
Remember, money from a tax-deferred account generally is subject to income tax when it is withdrawn. If you were planning to withdraw the money over your lifetime and now have to withdraw it within 10 years, your withdrawals will be larger, perhaps large enough to push you into a higher tax bracket where you’ll pay tax at a higher rate.

The new 10-year distribution period for non-spouse beneficiaries curtails the estate planning strategy known as the “stretch IRA”. This strategy typically involves naming a younger person, such as a child or grandchild, as the IRA’s beneficiary in order to maximize the time that the assets remaining in the IRA have to potentially compound tax-deferred or tax-free.
If your estate plan includes the stretch IRA strategy, you may want to review your plan with us in light of the shortened distribution period for non-spouse beneficiaries.

See also: The New CARES Act and the Impact on Retirement Plans and IRAs.

Please consult us for advice regarding planning for retirement.

With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to conduct business in an orderly fashion, especially in a disorderly world. Where there is uncertainty we look for facts. We call our approach evidence-based investing. Call us today at 802.878.2731 to schedule a strategy session and begin building your road map to financial success.

Article published in April 2020 edition of Eye on Money. If you would like to be added to our mail list please email jennifer@dh-cpa.com.