Comprehensive federal legislation referred to as the Setting Every Community Up for Retirement Enhancement (SECURE) Act (the “Secure Act”), became effective on January 1, 2020. The Secure Act makes changes to federal policy which may impact planning related to defined contribution plans, defined benefit plans, individual retirement accounts, and 529 plans. This article focuses on certain changes that impact owners and beneficiaries of retirement accounts, including traditional individual retirement accounts, Roth individual retirement accounts, and 401(k) and 403(b) plans (collectively “IRAs”). Required Minimum Distributions to Account Owner: The Secure Act raised the age at which an IRA owner is required to take minimum distributions (“RMDs”) from 70½ to 72 years old, for any account owner who turned age 70½ after December 31, 2019. Required Minimum Distributions for Inherited IRAs: Prior to the passage of the Secure Act, the timing of RMDs for an inherited IRA generally was based on the life expectancy of the person inheriting the IRA. This allowed individuals to “stretch” distributions from an inherited IRA over their lifetimes (as determined under IRS tables). The Secure Act, with some exceptions, requires individuals to take RMDs by December 31st of the tenth year following the death of the original account holder. This change only impacts IRAs which are inherited on or after January 1, 2020.
For example, if Jane inherits an IRA from her father who died on December 30, 2019, she can extend the RMDs over her lifetime, thereby stretching out income tax liability. In contrast, if Jane’s father died on January 1, 2020, with some exceptions, Jane must take RMDs by December 31, 2030.
Fortunately, certain individuals are exempt from the 10-year distribution rule, including a surviving spouse, minor children, individuals who are disabled, chronically ill or are less than 10 years younger than the original account holder.
For instance, using the example provided above, if Jane inherits an IRA from her father who died on or after January 1, 2020, and if Jane is an individual who is disabled or chronically ill as determined by the Secure Act, she will be able to extend RMDs over her lifetime. Based on the circumstances, if Jane is a minor child at the time her father dies, she potentially may be able to extend RMDs until age 36.
Contributions to IRAs: Prior to the Secure Act, the age limit in which an individual could contribute to an IRA was capped at age 70½. The Secure Act removes the age cap and allows individual to contribute earned income to a traditional IRA at any age.