The “Stretch IRA” is SECURE No Longer!
Congress finally passed the SECURE Act in late December 2019 and the President has signed it into law.
The “Setting Every Community Up for Retirement Enhancement” Act contains a variety of provisions related to IRA and 401(k) retirement plan rules that will have a major impact on many individuals’ financial and estate plans.
Some of the changes do live up to their billing as “enhancements”; however, one of the major changes is more likely to enhance Federal tax revenue at the expense of future retirement plan beneficiaries!
Here’s three key changes you need to know about:
Required Minimum Distribution (RMD) Age Pushed to Age 72
If you turn 70-1/2 in 2020 or later, you do not have to start required distributions until the year in which you turn 72. As under prior rules, you will still have the option to delay taking your first year RMD by April 1 of the following year. (If you turned 70-1/2 in 2019 or earlier, you must continue with RMDs as before.)
“Enhancement” Verdict? YES – especially for those that don’t need to take distributions to cover expenses.
(On a side note, the SECURE Act did NOT change the date at which you can begin to make qualified charitable distributions from IRA accounts: this remains unchanged at age 70-1/2.)
Traditional IRA Contributions No Longer Prohibited Once Turn Age 70-1/2
The SECURE Act lifts the prior prohibition on traditional IRA (i.e., non-Roth IRA) contributions once you reach the year in which you turn 70-1/2. Starting in 2020, individuals of any age can contribute to a traditional IRA if they have earned income or compensation (wages, self-employment income).
“Enhancement” Verdict? YES – this allows those that plan to work longer to continue to save to their traditional IRA accounts.
New “10-Year Rule” for Most Non-Spouse Retirement Plan Beneficiaries
It is a new world planning for the ultimate distribution of retirement plan accounts for those beneficiaries that inherit in 2020 and beyond. The ability to stretch IRA distributions over one’s lifetime has been eliminated for most non-spouse IRA and 401(k) plan beneficiaries.
A new “10-Year Rule” will apply to beneficiaries unless they qualify as an “Eligible Designated Beneficiary” as follows:
- Spousal beneficiaries
- Disabled or chronically ill beneficiaries (as defined by the IRS)
- Individuals who are not more than 10 years younger than the deceased account owner
- Certain minor children (of the original retirement account owner), but only until age of majority. (Note: Grandchildren are not included!)
Under the 10-Year Rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Within the 10-year period, there are no required annual distributions. Non-spouse Roth IRA beneficiaries will also be subject to the 10-Year Rule.
The SECURE Act did NOT change the ability of non-spouse beneficiaries to stretch out distributions from accounts inherited in 2019 or earlier.
“Enhancement” Verdict? NO – The new required distribution timeframe for most non-spouse beneficiaries will accelerate taxation and, depending on one’s tax situation and the size of the distributions, could push taxable income into higher tax brackets!
Implications for Trusts as Retirement Account Beneficiaries—It will be necessary to review your beneficiary designations and current trust provisions to ensure that they are consistent with the SECURE Act. Additional guidance from the IRS will likely be needed on how the law will be applied to trusts as retirement account beneficiaries.
The SECURE Act series continues on the SECURE Act: Step #1!
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