On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act,” or “Act”) was passed, which includes several provisions affecting Individual Retirement Accounts (“IRAs”) that will have an impact on IRA owners and beneficiaries. The major changes affect the required minimum distributions and the ability to stretch withdrawals from an IRA over the lifetime of the beneficiary. Because these provisions were effective starting January 1, 2020, prompt review of and attention to beneficiary designations and estate planning provisions is encouraged to determine the best ways to take advantage of these new rules.
Below is an overview of some of the most universally applicable changes to IRA and retirement plan management in light of the new legislation:
1. Required minimum distribution age raised from 70½ to 72
One of the most notable changes resulting from the Act is the increase in age for required minimum distributions (“RMDs”). Under the prior law, individuals had to begin taking distributions from an IRA by April 1 of the year following the year they turned 70 ½. Under the new law, an individual is not required to take distributions until the age of 72.
2. Repeal of the maximum age for traditional IRA contributions
Individuals who are currently over 70 ½ years old must continue to take the required minimum distributions as they have in the past. However, the Act has repealed the maximum age for traditional IRA contributions. Where in the past, individuals over the age of 70 ½ could no longer contribute to a traditional IRA, after January 1, 2020, individuals of all ages can continue to contribute to their IRAs throughout their income-earning years.
3. Partial elimination of stretch IRAs
For individuals who inherited an IRA from an individual who passed away prior to January 1, 2020, the IRS would allow the beneficiary to stretch out the tax-deferral advantages of the IRA by taking the distributions out over the lifespan of the beneficiary rather than the plan holder. Therefore, it was a common strategy for many planners.
However, for IRAs inherited from decedents after January 1, 2020, the beneficiary is now forced to withdraw the entirety of the IRA within a 10-year period or face a 50% tax penalty on the remaining assets. Some beneficiaries, such as surviving spouses, minor children, chronically ill individuals, and individuals who are no more than 10 years younger than the planner, are exempt from this rule; but overwhelmingly, most non-spouse beneficiaries will be subject to this requirement.
4. Penalty-free withdrawals for expenses related to the birth or adoption of a child
Generally, distributions from a pre-tax retirement plan must be included in income, and distributions before the age of 59½ are subject to a 10% early withdrawal penalty on the amount includible in income. However, starting in 2020, plan distributions up to $5,000 that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple pulling from two separate retirement plans could take up to $10,000 of distributions penalty-free.
The distribution must be made from the plan to an individual during the 1-year period beginning on the date on which the individual’s child is born or on which the legal adoption of an eligible adoptee is finalized. Subject to certain requirements, individuals may recontribute qualified birth or adoption distributions to their plan.
5. Reduction to Qualified Charitable Deduction Exclusion
The SECURE Act reduces the $100,000 qualified charitable distribution exclusion by the excess of the allowed IRA deduction for all taxable years ending on or after age 70½ over the amount of all prior year reductions. The provision is effective for distributions made for taxable years beginning after December 31, 2019.
The best way to assess how this Act will affect your individual planning is to meet with your trusted estate planning attorney, financial advisor, and/or tax advisor. To set up a meeting to review your retirement account beneficiary designations along with your estate planning documents, please contact Attorney Ryan A. Kuchmaner, certified by the Ohio State Bar Association as an Estate Planning, Trust & Probate Specialist and Coordinator of the Estates & Trusts Practice Group at Black McCuskey, Souers & Arbaugh, LPA. Many of these changes are effective as of January 1, 2020, so your prompt action is encouraged.