Important New Legislation – SECURE Act

Published On: January 30, 2020

Written by: Ben Atwater and Matt Malick

We are taking a pause from our investment review and outlook series to write you about an important piece of new legislation.  The SECURE Act (the Act) became law on Friday, December 20, 2019.

Many of the Act’s provisions went into effect on January 1, 2020.  We see three changes as most critical to our clients.  First, is the delay until age 72 for Required Minimum Distributions.  Second, is the new limited timetable for beneficiaries to stretch inherited IRA distributions.  And third, is the ability for those with earned income to continue contributing to their traditional IRAs past age 70 and ½, something that Congress previously forbade. 

There is still uncertainty, however, as several of the provisions included in the Act will be subject to interpretations from authorities.  Please reach out to us with questions and concerns regarding the Act.

Required Minimum Distributions (RMDs)

The beginning required minimum distribution age is now age 72 for those IRA and retirement plan account owners who reach the age of 70½ after December 31, 2019. This means that those reaching age 70½ in 2019 need to continue to take RMDs in 2020, but if you are 70 ½ after December 31, 2019, you can wait until age 72 to take your first RMD.  For clients who don’t need their IRA to supplement their retirement expenses or for clients working past 70, this is a terrific change.  It gives you (and us) additional flexibility with retirement income planning. 

Beneficiary (Inherited) IRA Distributions

Under the Act, fewer beneficiaries will be able to extend distributions from an inherited IRA over their lifetime. Most non-spouse beneficiaries will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent.

For most people, this change is a detriment as they can no longer stretch the taxes on inherited IRA distributions over several decades, as was often the case when an adult child inherited an IRA from a parent or grandparent.

The change is also problematic for those who have provisions in wills for IRAs to be kept in a beneficiary trust.  The new ten-year rule makes the tax implications of such a strategy less appealing.  If you have a beneficiary trust in your will, with the trust named as the beneficiary of your IRA, and your intention is for the trust to last for several years, you should consult your estate planning attorney.   

In certain limited scenarios, IRA owners and their beneficiaries may be able to use clever planning (timing distributions, charitable giving, life insurance, and Roth conversions) to take advantage of this new rule.  But overall, for most people, these beneficiary changes are a negative.

The new rules apply to IRA and retirement plan assets inherited after December 31, 2019.

IRA Contributions (age 70½)

Prior to the enactment of the Act, Congress did not allow traditional IRA contributions in the year an individual reached age 70½. Effective January 1, 2020, if a person is working and has earned income there is no age cap on IRA contributions. Individuals who were over 70½ and had earned income in 2019 are not eligible to make prior year contributions for tax year 2019.

With this new law we have some favorable provisions like the delay in RMDs to 72 and allowing IRA contributions for those working after age 70 and ½.  Conversely, we have a generally unfavorable change around the treatment of beneficiary (inherited) IRAs.  This Act combined with the Tax Cuts and Jobs Act of 2017 has made tax planning and retirement planning even more nuanced and complex in recent years.  Please know we are always available to discuss these and other changes as they relate to your specific circumstances.