On December 19th, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) was passed as part of a year-end spending bill. This recently passed legislation will impact how retirement plans work for many individuals and companies. The effective date for the new law is January 1, 2020.
These new provisions may have a material effect on your current financial plan and we recommend a review during 2020 to ensure your plan meets your financial objectives.
Required Minimum Distribution Starting Age Extended
The new legislation defers the Required Minimum Distribution (RMD) starting age from 70 ½ to 72 for individuals with retirement plans. This change only applies to individuals who turn 70 ½ after December 31, 2019.
Traditional IRA Contributions May Continue
Contrary to prior law, individuals who are still working after their RMD age will now be able to contribute to their traditional IRAs. In 2020, the contribution limit for an individual over age 50 is $7,000. Current law already permits contributions past age 70 ½ to Roth IRA and 401K plans and these provisions remain unchanged under the new law.
Inherited IRAs – The Stretch IRA has been abolished
Under previous law, if someone other than a spouse inherited an IRA, the beneficiary was able to “stretch” their required minimum distributions over their life expectancy. This allowed for continued tax-deferred growth over the beneficiary’s remaining life. However, with the SECURE Act in place, the beneficiary must now distribute the entire inherited IRA account within ten years of receiving it. There is no scheduled amount that must be distributed each year. For example, the IRA beneficiary may take multiple distributions throughout years one through ten, or he or she could wait until just before the end of the ten-year period and distribute the entire balance.
The new law also applies to Roth IRAs, which enjoy tax-free growth. There are exceptions for minor children (whose ten-year distribution period does not start until they reach majority age), disabled or chronically ill beneficiaries, and beneficiaries not more than ten years younger than the deceased owner.
The law does not affect anyone currently receiving inherited IRA distributions—only distributions for inherited IRAs established after December 31, 2019.
The result of this change is that a significant amount of tax-deferred growth for inherited IRAs established after 2019 is no longer available. This could mean a material change to one’s financial plan depending on your particular circumstances. Most importantly, the potential income tax impact of accelerated distributions requires advanced planning to maximize after-tax proceeds to you.
Note: A Spousal Rollover (where a spouse is a beneficiary) is different than an Inherited IRA (where someone other than a spouse is a beneficiary). Different rules apply and a Spousal Rollover is not affected by the new law.
Impact on Trusts as IRA Beneficiaries
The abolishment of the Stretch IRA may alter your estate plan as well. One common estate planning strategy is to name a trust as beneficiary of your inherited IRA. These trusts include specific language so that distributions can be stretched over the life expectancy of the trust beneficiary. While there is no change for a current trust beneficiary of an inherited IRA, the impact for a new inherited IRA with a trust beneficiary after December 31, 2019 is not clear. Although there is currently no guidance as to how these trusts will be impacted by the new law, the current view is that these trusts will be subject to the ten-year distribution treatment under the new law.
Changing from a lifetime distribution schedule to a ten-year schedule may require rethinking and revising your estate plan, including your trust documents.
Other parts of the Act include provisions that will increase annuity options inside retirement plans, increase small employer access to retirement plans, allow penalty-free distributions for the birth or adoption of a child, and other provisions.
The rules surrounding qualified charitable distributions are not changed under the new law. The ability to donate up to $100,000 from an IRA and not include the amount donated in taxable income remains available to those age 70 ½ and older.
The SECURE Act includes several changes that will impact our clients and their families. The most substantial changes are the extension of the RMD beginning age as well as the removal of the stretch IRA distribution schedule for inherited IRAs. We will closely monitor developments in this area in the weeks ahead and be in touch with our clients to advise them accordingly.
Please call your Round Table Wealth Management Financial Advisor if you would like to review your personal situation at this time.