At the end of last year Congress passed the SECURE Act. As is often the case with Congress, the acronym belies the content of the Act, in many respects, as it contains some provisions that are not altogether helpful to many individuals. Let’s review some of the major provisions (good and bad) of the Act.
Stretch IRAs:
For IRAs inherited prior to Jan 1, 2020, non-spouse non-trust beneficiaries, need to take a Required Minimum Distribution (RMD) from inherited IRAs each year based on their life expectancy, for the remainder of their life. The younger a beneficiary, the smaller the distribution, as a percentage of the balance. This meant that most of the IRA balance could remain tax-deferred until the beneficiary needed it.
The new rule requires that IRAs inherited on or after Jan 1, 2020 (with few exceptions) must be completely withdrawn within only ten years. This provision will require most beneficiaries to empty inherited IRAs, which are fully taxable, during some of their highest earning years. The net effect will be a tax increase on these individuals by forcing beneficiaries to recognize more income and by forcing many into a higher tax bracket.
Beneficiary IRAs that predate the new Act taking effect are grandfathered in under the old rules.
Required Minimum Distributions (RMDs):
Under the previous law, an individual must begin taking distributions from their own IRA by the end of the year in which they turned 70.5. The new law pushes that date out to their 72nd year. However, anyone who attained age 70.5 before Jan 1, 2020 is still subject to the old rule, and must continue taking RMDs. Anyone turning 70.5 on or after Jan 1, 2020 can now wait until age 72. Unlike Inherited IRAs, your own IRA RMD is still based on a lifetime schedule.
IRA Contributions:
The new Act updates IRA contribution rules to bring them in-line with other retirement accounts. Beginning tax year 2020, you can now make IRA contributions beyond the age of 70.5, as long as you have earned income equal to or greater than the contribution amount. You cannot, however, make a prior year contribution for tax year 2019 under this rule.
Withdrawals:
The Act allows for penalty-free withdrawals from IRAs of up to $5,000 in the event of a birth or adoption.
The greatest impact of the Act will be to force withdrawals from Inherited IRAs over an accelerated period and during a time in which many beneficiaries will already be subject to higher taxes due to being in their highest earning years. That being said, you can still employ strategies to help mitigate taxes during this period. One option may be to increase contributions to your employer-sponsored plans (401k, 403b, etc), which could help offset the taxable income you’d be forced to receive from the IRA.
Again, these changes are beginning tax year 2020 (on or after Jan 1, 2020), and Inherited IRAs and other IRA RMDs schedules which predate, are unaffected.
As always, work closely with your independent financial advisor to better understand how the Act may affect your individual circumstances, and to devise a strategy to manage the tax burden where possible.
Stephen Kyne, CFP is a Partner at Sterling Manor Financial, LLC in Saratoga Springs, and Rhinebeck.
Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret Grant & Co., Inc., SEC registered investment advisors. Sterling Manor Financial and Cadaret Grant are separate entities.
