SECURE Act – 2020

On January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act (the “Act”) went into effect.  This will result in significant changes to retirement planning.

The Act increases saving potential in tax-sheltered accounts by extending the maximum age for contributions. The Act also adds a new requirement.  This will significantly limit the time period during which most beneficiaries must withdraw the tax-sheltered account.  After the death of the account owner.

SECURE Act Removes Age-Based Contribution Limit and Increases Age for RMDs.

Prior to the Act, a traditional IRA owner was prohibited from making contributions after the age 70.5 (there were no similar age restrictions for contributions to a ROTH IRA). The Act removes that age limitation. A traditional IRA owner can contribute to the account at any age. Provided that such person is still working. Before the Act, an IRA owner was required to begin to take out RMDs in the tax year they reach the age of 70.5. The Act raises the RMD starting age to 72. Individuals who reached age 70 ½ on or before December 31, 2019, must start or continue to take RMDs at 70.5.

The SECURE Act Limits Stretching an Inherited IRA

The act expands the timeline for retirement savings.  It also could limit the benefits of inheriting an IRA. Previous rules provided that a non-spouse beneficiary of an inherited IRA could take out RMDs over the beneficiary’s life expectancy.  Thus stretching out the income tax resulting from each distribution.

The Act now requires most beneficiaries to entirely deplete the IRA within 10 years after the owner’s death. Unless a beneficiary is “qualified,” the 10-year rule applies. “Qualified beneficiaries” can still stretch out IRA distributions over the beneficiary’s life expectancy. They include a surviving spouse, a disabled or chronically ill individual, a child who has not reached the age of majority, and a beneficiary who is less than 10 years younger than the original account owner.

This change has the potential to create significant income tax liability for the beneficiary.  This would otherwise have been minimized by stretching out distributions over the beneficiary’s life expectancy. It also could be of particular concern to those who wish to use a trust to limit the manner and amount of distributions to a beneficiary.  If the purpose of the trust was to avoid significant amounts of money automatically passing to a beneficiary at a given time.