As of January 1, 2020 the “Setting Every Community Up for Retirement Enhancement” (“SECURE”) ACT became law, ushering in some of the most significant changes to IRA rules in more than a decade. We wrote about this bill in its preliminary stages in October, but now that the new rules are final, it is worth reviewing some of the more important changes.
Required Minimum Distributions now start at age 72
The beginning age for Required Minimum Distributions (“RMD’s”) has been extended to age 72. Under the old law, RMD’s began at age 70.5. Notably, this change only applies to individuals who turn 70.5 in 2020 or later. Those who turned 70.5 during 2019 or earlier are still required to keep taking RMD’s under the old rules.
No age limit for IRA contributions
There is no longer an age limit for contributing to an IRA, so anyone who is still working can contribute to an IRA regardless of age. Under the old law, you were prohibited from contributing to an IRA once you reached 70.5.
Birth or Adoption exception for the 10% Penalty
There is a new birth or adoption exception for pre-59.5 withdrawals from an IRA. You can take penalty free distributions from your IRA, up to $5,000 over your lifetime, in the year of birth or adoption of a child. Of course, you must still pay taxes on the distribution, but this could allow young families to access their retirement funds when a new child arrives.
New Inherited IRA 10 Year payout rule
Beginning for deaths after December 31, 2019, IRA’s must be fully distributed over a maximum 10-year period for most beneficiaries. You may recall that under the old inherited IRA rules, non-spousal IRA’s were generally required to be distributed over the beneficiary’s lifetime, allowing beneficiaries to stretch the IRA over many years and keep the tax burden low. Now, most beneficiaries will be required to distribute the entire IRA over 10 years.
We say ‘most beneficiaries’ because there are five classes of ‘eligible designated beneficiaries’ who are exempt from the 10-year rule: surviving spouses, minor children (only until they reach the age of majority), disabled individuals, chronically ill, beneficiaries not more than 10 years younger than the IRA owner.
The law appears to be a bit of a mixed bag for most retirees. Extending the RMD age to 72 will help some retirees by delaying their distribution. But the new inherited IRA 10-year payout rule will likely result in higher taxes for beneficiaries. We’ll be reviewing the changes with our clients this year to make sure their RMD planning and IRA beneficiary designations still make sense. If you would like to talk about your situation and how the law impacts you, please give us a call.