THE SECURE ACT: Does It Impact Your IRA, Estate and Retirement Planning?

Just a couple of weeks ago, Congress passed a massive bipartisan appropriations (spending) bill, in order to avert another government shutdown. Unexpectedly, it attached to it an item of legislation named the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which earlier this summer had passed the House with a 417-3 vote. (We initially reported this development in an earlier email blast, to join our email list, send Eugene an email.

President Trump has since signed this Act into law. Thus, the government is enacting major tax law changes to America’s IRA, Qualified Retirement Plan (401K, e.g.) and Inherited “Stretch IRA” structure that will take effect, on January 1, 2020, just a small number of days away.

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Highlights of the SECURE ACT:

Increase to 72 of the Age for Beginning RMD’s

Currently Required Minimum Distributions from IRA’s and “qualified” employer sponsored retirement plans such as 401K’s must begin in the year an investor turns 70½. (If you work past age 70½, RMDs from your current employer’s “qualified plan” aren’t required until after you leave your job, unless you own at least 5% of the company.)

The SECURE Act pushes the age that triggers RMDs from 70½ to 72, means that many of our members can let their retirement funds grow an extra 1½ years before tapping into them. However, this relief applies only to individuals turning 70½ in the year 2020 or beyond. Those that are obligated to take RMD’s, because they turned 70 ½ in 2019 or earlier must continue to make the already existing and prescribed annual RMD withdrawals. 

No Age-Based Restrictions on IRA Contributions

Americans are not only living, but are also working significantly longer. Consequently, the SECURE Act repeals the rule that prevented taxpayers age 70.5 and older from contributing to a traditional IRA. As of January 1, 2020, wage earning members (provided they meet all other investment parameters and limitations) can continue to put away money in a traditional IRA, even if they work into their 70s and beyond.

There continue to be no age-based restrictions on contributions to a Roth IRA.

Inherited (“Stretch”) IRAs are Significantly Restricted

Pre- SECURE ACT law allows all designated beneficiaries (spouses and non-spouses) of an account owner’s IRA or qualified defined contribution plan such as a 401K to “stretch out” required minimum distributions over his or her lifetime. The IRS provides a chart-formula that prescribes each annual minimum withdrawal.  Such so-called stretch IRAs not only provide beneficiaries regular supplementary income, but also allow them to continue to enjoy perpetual tax-deferral of investment gains. The SECURE ACT, as summarized below, changes this result significantly. 

The SECURE Act’s new RMD provisions go into effect on Jan. 1, 2020. As such, beneficiaries of defined contribution plans and IRA account owner-participants who die before Jan. 1, 2020, and any existing inherited IRAs would fall under the existing generous RMD lifetime stretch rules. Anyone whose benefactor dies after Jan. 1, 2020 would fall under the new SECURE Act rules.

            “Specifically, The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades). Instead, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule applies to inherited funds in a 401(k) account or other defined contribution plan, too.)”

            “There are some exceptions to the general rule, though. Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.”  

Rocky Mengle, 10 Ways the SECURE ACT Will Impact Your  Retirement Savings, Kiplinger (December 19, 2019)   

Spouse beneficiaries are also exempted from the change; i.e., they are also considered to be “eligible beneficiaries”. The right of a spouse beneficiary to assume his or her deceased spouse’s IRA or to rollover Plan monies into her own rollover IRA also continues unaffected by the SECURE Act. 

Non-Person Beneficiaries

This article specifically does not address any affect that the SECURE ACT might have on non-persons (e.g., trusts and estates) that are or become IRA and Qualified Retirement Plan beneficiaries. You are encouraged to seek appropriate expert legal, tax and financial advice in and about these scenarios, options and issues and when considering a non-person beneficiary designation.  

Grad Students and Care Providers Can Save More

Annual contributions to a retirement account (IRA’s and/or Qualified Retirement Accounts such as a 401K’s) generally cannot exceed the amount of a person’s compensation or a prescribed maximum, whichever is lesser. The SECURE ACT changes current law by including amounts paid to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) as compensation for purposes of making IRA contributions. This provides an immediate opportunity for students that do not otherwise earn a wage to start saving earlier. Similar rules and results apply to “difficulty of care” payments that foster-care providers receive through state programs to care for disabled people in the caregiver’s home.

Penalty-Free Child Birth or Adoption Withdrawals

In order to assist parents with covering birthing or adoption costs, the new law allows parents to withdraw from their 401K’s and IRA’s up to $5,000 each, without paying the usual 10% early-withdrawal penalty; provided, they make the withdrawals within a year following the birth or adoption of a child. Any such adopted child must be less than 18 at the time of the adoption, or be physically or mentally incapable of self-support. The penalty will still apply, however, if one of the parents is adopting their spouse’s child.

The parents will still owe income tax on the distributions, unless they repay the funds; recontributed amounts are treated as a rollover and not included in taxable income.

This exception to early withdrawal (prior to age 59.5) 10% penalties join others that already exist: first-time home purchases (up to a one-time $10,000 withdrawal); costs of higher education; and catastrophic medical expenses. 

BIBLIOGRAPHY:

You can find additional and more detailed information and additional effects, provisions and consequences of the SECURE ACT at these links:

 Rocky Mengle, 10 Ways the SECURE ACT Will Impact Your  Retirement Savings, Kiplinger (December 19, 2019)

Jamie P. Hopkins, SECURE Act Sets Up Inherited RMD Complexity for Advisors: Both sets of rules are important to know, because existing inherited IRAs are grandfathered into the previous rules”, Wealth Maangement.com (December 18, 2019)

The above discourse is provided for general informational purposes. You are encouraged to consult expert tax, estate and financial advisors and planners, (1) with respect to any questions or issues and (2) to determine how these new laws (and resulting regulations) may affect your personal situation and to consider setting appropriate plans in consultation with such expert advisors and planners. You are encouraged to study these developments, as they continue to occur.