Congress recently passed and the President signed into law the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). The SECURE Act (the “Act”) makes significant changes to the rules related to qualified retirement plan accounts, including IRAs (“Retirement Accounts”). The Act became effective January 1, 2020.
On the positive side, the Act eliminated the maximum age at which an individual can make contributions to a traditional IRA. Under the old rules, an individual could make contributions only until the year in which such individual attained age 70½. Under the Act, there is now no maximum age for making contributions; however, an individual, regardless of age, must still have earned income to make contributions.
Also on the positive side, the Act pushed back the required beginning date for distributions from Retirement Accounts. Under the old rules, distributions were required by April 1 of the year following the year in which an account owner attained age 70½. Under the Act, that age has increased to 72.
On the negative side, and most significantly, the Act eliminated the “stretch IRA” in most circumstances. Under the old rules, with regard to a Retirement Account of an owner who died prior to 2020, the beneficiary generally was allowed to stretch out distributions over the beneficiary’s lifetime. This allowed the beneficiary to minimize distributions from the Retirement Account, which then maximized the funds that would grow in such account tax deferred. Under the Act, the ability to stretch distributions over the beneficiary’s lifetime has been eliminated except in limited circumstances. Instead, unless a specific exception applies, all Retirement Account assets are required to be distributed to the beneficiary within 10 years following the death of the owner.
While generally eliminating the stretch IRA, the Act does provide limited exceptions to the new 10-year distribution rule. Specifically, the Act does not change the distribution rules for spousal beneficiaries. A spouse who is named the beneficiary of a Retirement Account still has the option of taking distributions over such spouse’s lifetime or rolling over the assets into the spouse’s own IRA. Likewise, a beneficiary who is not more than 10 years younger than the deceased account owner also is allowed to use such beneficiary’s life expectancy for purposes of taking distributions. The Act provides additional exceptions for minor children of an account owner who are named beneficiaries and for beneficiaries who are disabled or chronically ill.
Over the years, many individuals have structured their estate plans to take advantage of the “stretch IRA” option. With that option now largely eliminated under the Act, individuals should review their existing beneficiary designations and estate planning documents with BARRY LAW, INC. to determine whether revisions are needed.