The SECURE Act was signed into law by President Trump at the end of 2019, and makes sweeping changes to the laws affecting retirement plans, including IRAs. The law, known as the SECURE Act, is a mixed bag of good, bad, and ugly. This article breaks down the details that IRA owners need to know moving forward.
RMD Age Raised to 72
- Required Minimum Distributions (RMDs) are no longer required until the IRA owner reaches 72. Prior to the new law, RMDs were required once the account owner reached age 70½. By extending the RMD requirement to 72, IRA owners can delay taking distributions from the IRA by an additional 1½ years. This is a good thing as you can let more money grow tax-deferred. The 70½ year rule was also confusing, as it takes a while to do the math and figure out what year you turn 70½. It used to be the only half-birthday you had to keep track of. There is still no RMD requirement on Roth IRAs. Also, if you already reached 70½ in 2019 or earlier, then you continue taking distributions as usual (even if you aren’t yet 72).
IRA Age Limit for Contributions Removed
- There is no longer an age restriction on when you can contribute to an IRA. Prior to the law, Traditional IRA contributions were restricted once you reached RMD age of 70½. Under the new law, there is no longer a restriction (even when you each 72). This means older IRA owners who are still working or have earned income can continue to contribute to a Traditional IRA.
Exception to 10% Early Withdrawal Penalty for Birth or Adoption
- A new exception to the 10% early withdrawal penalty was added in the case of the birth or adoption of a child. This is limited to $5,000, but will allow new parents to withdraw up to $5,000 from any IRA or other retirement account without having a 10% early withdrawal penalty apply. Taxes would still be due on Traditional (pre-tax) funds withdrawn, but the 10% penalty is waived.
The Stretch IRA Has Been Gutted
- The Stretch IRA, whereby a non-spouse could inherit an IRA or Roth IRA and take distributions over their lifetime, has been gutted. While a non-spouse can still inherit an IRA or Roth IRA, the account (in most instances) must be distributed in 10 years. There are no annual distributions required under this new rule over the 10-year period. Instead, the total account balance just needs to be distributed in 10 years. So, if you inherit an IRA in 2020 or later, then you will have 10 years to continue investing the account and you can take distributions whenever you want (or just at the end) with the full amount being distributed within 10 years. There are some persons who can still use the old Stretch IRA rules, but these groups are limited and include: Disabled or chronically ill persons, minor children inheriting, and beneficiaries not more than 10 years younger than the IRA owner.
The elimination of the Stretch IRA was bad and ugly. What else can I say? The only good news is that those who have already inherited one in 2019 or earlier can still operate as usual. Everyone else who looked forward to one will have to take solace in the fact that they at least have 10 years of “stretching” to continue investing the funds in a tax-free (Roth) or tax-deferred (Traditional) manner. And, under the new rule, there is no RMD rule in effect each year. Instead, the total amount must be distributed at the end of 10 years. This makes things a little easier with self-directed assets and also helps any IRA owner – 10 years is still a good amount of time – get a little bit of additional tax-deferred (Traditional) or tax-free (Roth) growth.
At Directed IRA we are a custodian of inherited Traditional IRAs and inherited Roth IRAs, we are keenly aware of the changes and are helping our clients understand the new rules. Please reach out and gives us a call if you have questions on these new rules.