The SECURE Act (which stands for "Setting Every Community Up for Retirement Enhancement") was enacted at the end of last year and makes several significant changes to the laws governing retirement accounts. The changes noted below will have consequences for both retirement and estate planning.
1. End of "Stretch" IRAs
Prior to the enactment of the SECURE Act, an individual who inherited an IRA could "stretch" the IRA over his or her life expectancy, allowing the funds to continue to grow on a tax-deferred basis. Effective January 1, 2020, the SECURE Act ends the "stretch" IRA for many individuals and provides that a beneficiary must withdraw all funds from an IRA account within ten (10) years from the date of death of the IRA owner (the "10-year rule"), potentially accelerating the beneficiary's income tax liability.
Spouses, disabled or chronically ill individuals and beneficiaries who are not more than 10 years younger than the account owner are exempt from the 10-year rule and will continue to be allowed to "stretch" an inherited IRA. Minor children of the account owner are exempt until they reach the age of majority.
For beneficiaries who inherited an IRA in 2019 or earlier, or are in the process of establishing an inherited IRA based on a date of death that occurred prior to January 1, 2020, the "stretch" provisions remain in place.
2. Increase in Age for Required Minimum Distributions ("RMDs")
Prior to January 1, 2020, annual distributions from a traditional IRA or a qualified plan such as a 401(k) were required to commence at age 70½. The RMD age is now extended from 70½ to 72.
3. Repeal of Maximum Age for Traditional IRA Contributions
The SECURE Act repeals the maximum age of 70½ for making contributions to an IRA (although other limitations on contributions still apply). Beginning in 2020, an individual of any age may continue to make contributions to his or her IRA as long as he or she remains employed.
4. Removal of Penalty for Birth or Adoption-Related Withdrawals
Under prior law, a 10% penalty was assessed on withdrawals from IRAs and qualified plans prior to the account owner reaching age 59½. Effective as of January 1, 2020, the 10% penalty is eliminated for up to $5,000 of expenses related to a qualified birth or adoption.
The SECURE Act changes are particularly important for clients who have planned for the use of trusts as recipients of their retirement assets.
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