A newly passed law affects retirement accounts starting January 1, 2020, including how inherited IRAs are treated, how much you can contribute to your own IRA, and when you have to start taking your required minimum distributions.
This past Friday, December 20th the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law. The passing of this law brings both advantages and disadvantages to business and consumers.
Starting with the bad news, the Act puts into effect on January 1, 2020 the following:
The “Stretch IRA” for non-spouse inherited IRA beneficiaries goes away. IRA beneficiaries were able to stretch the distributions and taxation over their lifetimes, which could potentially be over multiple decades.
A new “10-Year Rule” goes into effect, where most non-spouse beneficiaries will need to withdraw the entire account within 10 years.
HOWEVER, the new 10-Year Rule does not apply to the spouse of the original owner. Also, the new rule goes into effect January 1, 2020 so if the original IRA owner dies before that date the beneficiaries are grandfathered under the old “stretch” rules. There are other exemptions for heirs that are less than 10 years younger than the decedent, as well as for the chronically ill, disabled, and for minor children.
The positive aspects of the new Act are as follows:
Required Minimum Distributions (RMDs) now start at age 72, rather than 70½.
Workers over age 70 can start making IRA contributions up to $7,000 per year (including the $1,000 catch-up contribution for workers over age 50). A nonworking spouse whose spouse earns income can also contribute.
People who are 70½ or older can still make a Qualified Charitable Distribution (“QCD”) from their IRA to one or more charities, up to $100,000 in a given year. Anti-abuse provisions do apply.
The Act increases the tax credit for small businesses to set up new retirement plans, from $500 to $5,000.
For new 401(k) plans and SIMPLE IRA plans that include automatic enrollment, it creates a new tax credit of up to $500 per year to defray startup costs.
Also, unaffiliated small employers are now able to band together to offer a 401(k) type of plan and shift some of the administrative burden to a retirement plan administrator.
In light of these changes, existing estate plans should be revisited and reviewed for the following:
Charities should be considered as retirement account beneficiaries rather than individuals due to the potential loss of decades of tax deferral.
Strategies such as Roth IRA conversions and multi-generational trusts are tools that will be even more useful in managing income tax brackets.
Use of a conduit trust as an IRA beneficiary may be a problem now. Under the previous Stretch IRA rules, trust distributions could be spread over the life expectancy of the beneficiary. Now with the IRA emptied within 10 years the funds will effectively be distributed outright to the trust beneficiary, thus negating the elements of the trust that were sought after.