What You Need to Know About the SECURE Act

Benjamin J. Michaud, CFA

BIO

On December 20, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law, and it took effect on January 1. The Act changes the rules around retirement plans in ways that may influence many individuals’ retirement and estate planning strategies. A few of the biggest investment-related changes include new rules for inherited (non-spousal) retirement accounts, a slightly higher age for required minimum distributions, and removal of the age limit for workers to contribute to IRA accounts. The aforementioned changes are summarized below, and a full version of the Act is available here.

The “Stretch IRA” is replaced with a New 10-Year Rule

The SECURE Act’s most significant change is the elimination of the “stretch” provisions for retirement accounts. Previously, a non-spouse beneficiary of an inherited IRA and other retirement accounts could “stretch” out his or her distributions over his or her life expectancy. But now (as of January 1), if a retirement account owner dies, most non-spouse beneficiaries will be required to withdraw all funds from the account within 10 years of the death. 

There is some flexibility in satisfying this 10-year requirement, as there are no longer annual required minimum distributions. This means beneficiaries can take equal distributions over 10 years, take more distributions during years when they have less income and fewer distributions during years that they have more, or even wait and take the entire distribution in the last year. No matter how the 10-year withdrawal requirement is satisfied, this shorter time period will certainly accelerate the payment of income tax, especially as many non-spouse beneficiaries may still be in their prime earning years at the time of inheritance. 

Notably, the new 10-year withdrawal requirement does not apply to the following groups of individuals:

1. Surviving spouses: A surviving spouse is not subject to the 10-year rule, so he or she may continue to utilize a spousal rollover.
2. Beneficiaries 10 or fewer years younger than the account owner: In this case, the old age-based distribution rules apply. Siblings, for example, may benefit from this exception.
3. The account owner’s minor child: If a minor child of the account owner is the beneficiary, then the retirement assets can be distributed at the old distribution rate, but only until the minor reaches the age of majority. At that time, the 10-year rule would apply.
4. Disabled beneficiaries: If a beneficiary is disabled, the old age-based distribution rules apply for as long as the disability exists. Should the disability cease to exist, or upon the death of the disabled beneficiary, the 10-year rule would apply.
5. Chronically ill beneficiaries: If an individual is chronically ill (as defined in the Internal Revenue Code), the old-age-based distribution rules apply.

Age for Required Minimum Distributions (RMDs) Raised to 72

The Act increases the mandatory age at which individuals must begin taking RMDs from age 70 ½ to age 72. It’s not a huge change, but it was certainly long overdue given that the starting age for required minimum distributions has not been increased in decades, even though people are living and working longer. 

It is important to note that this new required starting age only applies to individuals who turn 70 ½ in 2020 or later, so those individuals born after July 1, 1949.  Anyone who was already 70 ½ before January 1, 2020 will be required to take RMDs under the existing rules. 

Qualified Charitable Distributions are Still Allowed at Age 70 ½

Upon reaching the age of 70 ½, individuals have been able to use a technique known as a qualified charitable distribution (QCD) to make IRA distributions directly to a charity (up to $100,000/year). The SECURE Act still permits QCDs and keeps the starting age at which individuals may make these at age 70 ½. Those who turn 70 ½ after 2020 may begin to make QCDs even though they will not be required to take minimum distributions until age 72. 

Contributions to Traditional IRAs Now Allowed Beyond Age 70 ½

Prior to the SECURE Act, individuals could no longer contribute to an IRA once they turned 70 ½, even if they continued to work. Now the SECURE Act removes this age restriction on Traditional IRA contributions, allowing individuals to keep contributing to IRAs, if they have earned income, no matter their age. This earned income requirement remains so only those who work after age 70 ½ (or have a spouse who is still working and can contribute under the spousal IRA rules) will benefit from this provision change.

This is a high-level overview of what is fairly significant tax and retirement reform. These changes will be topics of discussion during client meetings, but please do not hesitate to contact us directly to determine how these changes may impact your specific situation.