Our Northeast Ohio Estate Planning Attorney Shares What You Need to Know About the SECURE Act and Your Retirement Plan
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed at the very end of 2019 and is the most significant change in the interaction of taxes and retirement planning since the 1986 Tax Reform Act. The SECURE Act affects both individual retirement plans, such as IRA and employer-sponsored plans. You can learn about the effects this Act had on individual retirement plans from our Northeast Ohio estate planning attorney.
Changes to the Required Minimum Distribution Rules (RMD)
An IRA, not a Roth IRA, has what is called a required minimum distribution rule in that when the owner reaches a certain age, then under the tax law, they are required to take out a minimum distribution from their IRA. Prior to the SECURE Act, when an individual turned 70.5 they had to start taking the required minimum distribution from their IRA. If this distribution amount was not taken, the individual faced a significant tax penalty. Under the SECURE Act, the required age for the RMD is now 72 instead of 70.5.
This is important because it allows the individual to maintain their money in a tax-deferred investment for a more extended period.
Age Limit Removed on Contributions
Before the SECURE Act, individuals could not contribute to a traditional IRA if they were over 70.5. The SECURE Act eliminated this age restriction, and starting in 2020, an individual can contribute to a traditional IRA regardless of age.
Inheriting an IRA
Perhaps the most significant change in the SECURE Act has to do with the substantial changes to what is permissible when an individual inherits an IRA. To determine what options are available upon inheriting an IRA, we first must decide if a spouse or non-spouse inherits.
Spouse Inherits an IRA
Before the SECURE Act, a spouse who inherits an IRA was able to roll over the IRA into their own IRA and treat the IRA as their own in regards to the RMD. The SECURE Act did not change this, and a surviving spouse still has the option to roll over the inherited IRA.
Non-Spouse Inherits an IRA
Before the SECURE Act, a non-spouse who inherits an IRA could roll over the IRA and then take the RMD out over their life expectancy. For example, Tom, age 40, inherited an IRA worth $100,000 from his mother, and he rolled the IRA. Tom is required to take the RMD each year. Under the Uniform Life Expectancy Tables, Tom would use a factor of 43.6 years. This would result in a required minimum distribution of $2,294.00 ($100,000/43.6). Tom would then have to report this income on his tax return and pay the appropriate tax.
Under the SECURE Act, a non-spouse who inherits an IRA is (except for a few exceptions discussed below) NOT permitted to roll over the IRA and must take the distributions from the IRA out within ten years. Under the 10-year rule, all amounts must be distributed by December 31 of the year containing the 10th anniversary of the date of death, and in the interim, no distributions are required.
Exceptions to Non-Spouse
Under the SECURE Act, there are several exceptions to this 10-year rule if a non-spouse inherits an IRA:
- If a minor child inherits an IRA, the ten years does not start until the child reaches the age of 18. If a child is eight when they inherit an IRA, upon the child turning the age of 18, the ten years starts, they must distribute out the IRA by the age of 28. This exception for minor children only applies to children of the IRA owner, not grandchildren.
- If a beneficiary is disabled under Section 72(m)(7) or is chronically ill under Section 7702(b)(c)(2), then the 10-year rule does not apply. The life expectancy payout will apply to these two categories of beneficiaries. However, upon the passing of these beneficiaries, the 10-year rule will apply.
- If a beneficiary is less than ten years younger than the owner, then the life expectancy tables apply when they inherit the IRA.
The SECURE Act significantly impacts the intersection of estate planning and IRAs. Your average individual has most of their wealth tied up in IRAs, and it is essential to have the proper legal and tax guidance with these assets as they relate to estate planning.