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The Secure Act and Its Impact on Your IRA
The Secure Act and Its Impact on Your IRA
By: Catherine A. Ray
In December 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act“), which makes several changes impacting individual retirement accounts (“IRAs“) and tax-qualified retirement plans such as 401(k) Plans.
1. Required Minimum Distributions Now Begin at 72.
Prior to the enactment of the SECURE Act, IRA owners and 5% owners of employers who maintain profit sharing and 401(k) plans (“Participants”) were required to begin taking distributions from their accounts by April 1 of the year following the year they attain age 70½. The SECURE Act modifies this requirement by increasing the age from 70½ to 72. This means they may delay taking distributions until April 1 of the year following the year they reach age 72. This change allows Participants to push off distributions from their IRAs for an additional one or two years, allowing the assets in the account to continue accumulating on a tax-deferred basis.
Note: This age increase will not impact individuals who attained age 70½ in 2019. If you did so, you must begin to receive your distributions by April 1, 2020 or face a significant penalty.
2. Repeal of Maximum Age for Traditional IRA Contributions.
The section of the Internal Revenue Code (the “Code”) that applied a maximum age for contributions to an IRA (age 70½) has been repealed. This means an individual who has not yet attained age 70½ as of December 31, 2019 may continue to contribute to his or her IRA until he or she is required to take minimum distributions (i.e., until he retires). The 2020 IRA contribution limit is $6,000 ($7,000 if you are age 50 or older).
3. Certain Taxable Non-Tuition Fellowship and Stipend Payments Treated as Compensation for IRA purposes.
Individuals who receive stipends or non-tuition fellowships for graduate or post-doctoral study may now contribute those funds to an IRA.
4. New Parents May Now Withdraw up to $5,000 Penalty Free.
The 10% early withdrawal penalty for distributions before age 59½ will not apply to a withdrawal for a qualifying birth or adoption distribution of up to $5,000. To qualify, the distribution must occur within one year of the date the child was born or on which the legal adoption was finalized. In addition, the withdrawal can be repaid as a rollover contribution to the Participant’s IRA.
5. Inherited IRAs Generally Must be Distributed Entirely Within 10 Years.
For Participants who die on or after January 1, 2020, the SECURE Act now requires (with exceptions described below) the Participant’s entire account balance to be distributed within 10 years following the Participant’s date of death. This rule predominantly replaces the old five-year “stretch out” rule. The new 10-year distribution period applies regardless of whether the Participant dies on, before, or after the Required Beginning Date (which, as mentioned above, is now April 1 of the year following one’s 72nd birthday).
The SECURE Act carves an exception for certain “Eligible Designated Beneficiaries”, which include: (a) the Participant’s surviving spouse; (b) a child who has not yet reached the age of majority (age 18 in New York); (c) a chronically ill individual; or (d) an individual not more than 10 years younger than the Participant.
If the Participant designates a beneficiary who qualifies as an Eligible Designated Beneficiary, the account balance may be distributed over the life or life expectancy of the beneficiary. Once the Eligible Designated Beneficiary has died, however, the entire account balance must be distributed within 10 years of that beneficiary’s death, regardless of who is named as his or her successor beneficiary.
If a Participant designates a minor child as his or her beneficiary, the entire account balance must be distributed within 10 years after the minor turns 18 years of age.
Many of our clients have designated trusts as IRA beneficiaries to maintain trustee control over the IRA. Those trusts are allowed to draw out the IRA over the beneficiary’s lifetime if the trust requires each year’s IRA distribution to be immediately passed out to the beneficiary. In view of the SECURE Act’s forcing the trustee to withdraw the entire IRA account within 10 years, requiring the trust to pass out to the beneficiary the IRA distribution when received may no longer be appropriate. The client should evaluate that along with the tax effect of anticipated large distributions made to satisfy the 10-year rule. These issues can be addressed with revisions to clients’ estate planning documents. If you have any questions, please do not hesitate to contact me or Stewart McGough, Esq.
