The SECURE Act—landmark legislation that may affect how you plan for your retirement—was recently passed by Congress and signed into law, and many of its provisions are now in effect. Now is the time to consider how these new rules may affect your tax and retirement plans.
The new law may provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact.
KEY PROVISIONS OF THE SECURE ACT AFFECTING INDIVIDUALS:
Repeal of the Maximum Age for Traditional IRA Contributions
Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has earned income from wages or self-employment.
Required Minimum Distribution Age Raised to 72
Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions from their plan by April 1 following the year in which they turned age 70½. The age requirement was first applied in the early 1960s and had not been adjusted to account for increases in life expectancy.
For individuals who attain age 70½ after December 31, 2019, the age at which they must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.
Partial Elimination of Stretch IRAs
For deaths of plan participants or IRA owners occurring before 2020, beneficiaries were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary's life or life expectancy—sometimes referred to as a "stretch IRA."
However, for deaths of plan participants or IRA owners occurring after 2019 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be completed within ten years following the plan participant's or IRA owner's death—the "stretching" strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions to:
- the surviving spouse of the participant/owner;
- a child of the participant/owner who has not reached majority;
- a chronically ill individual; and
- any other individual who is not more than 10 years younger than the participant/owner.
Those beneficiaries who qualify under one of these exceptions may generally still take their distributions over their life expectancy.
Many estate plans will be able to take advantage of one or both of the first two exceptions. Note that, under the second exception, the 10-year rule is suspended while the child is a minor. When the child reaches the age of majority, the account must be distributed to the beneficiary within 10 years from that date.
In addition, a designated beneficiary under the fourth exception may still withdraw the assets from the retirement account over their own life expectancy. This might allow the participant/owner's siblings, for example, to take withdrawals over more than 10 years as long as they are not more than 10 years younger than the participant/owner.
We Can Help
If you have questions about how the SECURE Act might affect your planning, please give your Maslon attorney a call. We are happy to help.