As 2019 was coming to a close both the House and Senate passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act which was quickly sent to the President’s desk to be signed.
Upon analyzing the Secure Act’s changes, they are not nearly as substantial as those resulting from the Tax Cuts and Jobs act passed two years ago. But they do have powerful implications on retirement plan participants.
Stretch IRA Elimination
Among the changes, the elimination of the Stretch IRA is the one that will affect client planning most notably with respect to estate planning. The name by which most people will know the stretch IRA is the Beneficiary IRA. Prior to the passing of the SECURE Act a non-spouse beneficiary inheriting an IRA had the option to spread the IRA distributions over their lifetime, regardless of age. The non-spouse beneficiary was required to take a minimum distribution per year but had the option to take any amount in excess of the minimum if they wished. Beginning in 2020 the SECURE Act has enacted the 10-Year Rule which requires a non-spouse beneficiary to distribute the IRA entirely by the end of the 10th year following the year of inheritance. There is not a required minimum distribution at any time except for the 10th year at which time the non-spouse beneficiary must distribute any remaining IRA balance. Anyone that inherited an IRA in 2019 or prior is grandfathered and is not affected by the new 10-Year Rule.
There are two notable exception to the 10-Year Rule imposed on non-spouse beneficiaries. First, if the beneficiary of the IRA is less than 10 years younger than the decedent (such as a sibling) they are still able to utilize the previous Stretch IRA provisions. Additionally, a minor beneficiary can take advantage of the Stretch IRA provision until they reach majority. Once they reach majority they than have ten years within which to distribute the entire inherited IRA.
Change to the Required Minimum Distribution (RMD) Beginning Age
The next most significant change resulting from the SECURE Act is the change in the age at which IRA owners must begin Required Minimum Distributions (RMD) from their IRA. While not a huge change, any reprieve from unnecessary income is welcomed by many retirees. Before the SECURE Act, IRA owners were required to begin taking taxable RMD’s from their IRA beginning in the year they turned 70 1/2. The Act has increased that age from 70 ½ to 72. (I think the best thing to come of this change is they did away with the ½). Unfortunately, those IRA participants that turned 70 ½ in 2019 or prior, are still required to continue taking their RMD’s.
No Change to the Qualified Charitable Deduction (QCD)
As a way to manage their tax liability many of our clients taking RMD’s have taken advantage of the Qualified Charitable Deduction (QCD). The QCD allows an IRA holder to donate up to $100,000/year to a qualified charitable organization directly from their IRA. Taking advantage of the QCD option enables the IRA holder to make a charitable contribution without having to show the proceeds as income on their tax return. An IRA account holder was only able to take advantage of the QCD once they reached age 70 ½, the same age an accountholder was previously required to begin taking RMD”s. One of the concerns was that if the SECURE Act changed the age at which IRA account holders are required to begin taking RMD’s, would that change the age at which IRA account holders could take advantage of the QCD. Alas, the age to take advantage of the QCD did not change and IRA account holders can still begin using the QCD option the year in which they turn 70 ½.
Change to IRA Contribution Age Restrictions
One thing that has been noticed is that as years have passed people have been working later and later in life. However, during that time frame, the maximum age a person with earned income could contribute to an IRA was capped at age 70 ½. Beginning in 2020 the SECURE Act has removed the 70 ½ age limit for individuals with earned income to make contributions to an IRA. At this time there is no age limit at all.
While there are a good many other changes that became effective in 2020 as a result of the passage of the SECURE Act, the ones we have covered here are the ones that will be most encountered by the average investor with an IRA.