In 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The SECURE Act provides a mixed bag of incentives and obligations for retirement savers. Its intent is to make it easier for families to save more for retirement. Here is an overview of the most significant features of the law as it may pertain to you.
The SECURE Act includes several incentives to start saving sooner, and keep saving longer.
- Initial RMD increases to age 72 – Until now, you had to start taking Required Minimum Distribution (RMDs) out of your traditional IRA at age 70 ½. RMDs are then taxed at ordinary income rates. Now, you don’t need to begin taking RMDs until age 72. Rules for qualified charitable distributions (QCDs) and Roth IRA withdrawals remain unchanged.
- IRA contributions for as long as you’re employed – If you work past age 70 ½, you can now continue to contribute to either a Roth or a traditional IRA.
- Expanded participation for long-term, part-time employees – Even if you’re a part-time employee, you may now be able to participate in your employer’s 401(k) plan.
- Additional small-business incentives – The SECURE Act provides a few other tax breaks and credits to help small businesses open and operate employer-sponsored retirement plans for their employees.
Non-Spouse Stretch IRAs Mostly Go Away.
Presumably to offset the expected reduction in federal income tax collections due to increasing the RMD age to 72 the Act eliminates the use of stretch IRAs for most non-spouse beneficiaries.
With some exceptions, heirs will now be required to move assets out of inherited IRA accounts within ten years after receiving them, thus having to pay taxes on the proceeds much earlier than under the old law.
There is also concern that estate plans and trusts written to take advantage of the stretch IRA will require immediate attention.
Ten Year Payout Rule
The most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. The good news is there are no other distribution requirements within those 10 years, so designated beneficiaries will have some flexibility around the timing of those distributions.
Example: On January 20, 2020, Bill’s father passed away, leaving Bill his $400,000 IRA. Bill, who is currently age 60, is still working and earns roughly $150,000 per year, but plans to retire in 5 years, at age 65.
Given the fact that Bill’s income will substantially decrease when he retires, it may make sense for him to avoid taking any distributions from the inherited IRA while he is still working (i.e., during the first 5 years of the distribution window provided by the 10-Year Rule). Instead, he can opt to distribute the funds during years 6-10, when he expects his income to be much lower after his wages are gone (and before he begins Social Security benefits).
For additional information about the SECURE Act and how it might affect you please click here to access our free white paper: The SECURE Act.