The Secure Act – Effective 1/1/2020

Summary of Changes Brought About by the Secure Act

The “Setting Every Community Up for Retirement Enhancement” Act (the SECURE Act) was signed into law by the President on December 20, 2019 and became effective January 1, 2020. The following is a brief summary of some of the Act’s provisions.

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 compensation, which generally means earned income from wages or self-employment.

Required Minimum Distribution Age Raised From 70½ to 72

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Elimination of Stretch IRA Provisions for Inherited IRAs

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and non-spousal) of inherited IRAs were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking required minimum distributions (RMDs) over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).

However, for deaths of plan participants or IRA owners on or after January 1, 2020, inherited IRAs are required to be completely distributed within 10 years following the death of the original account owner, with a few limited exceptions. As a result of this change, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are permitted for distributions to: (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under these exceptions may generally still take their RMDs over their life expectancy (as permitted under the rules in effect for deaths occurring prior to 2020).

In view of this significant change to the RMDs for inherited IRAs, estate plans put in place prior to January 1, 2020 may need to be revisited.