On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law by President Trump. The SECURE Act made many significant changes to the treatment of retirement and other savings plans and corrected a few unfavorable changes that had been put in place from the TCJA.

We will present the highlights of the SECURE Act in this three-part series; Part 1 and Part 2 will cover changes for individuals and Part 3 will cover changes for small businesses.

IRA Contributions and Required Minimum Distribution Rules Have Changed

Before the SECURE Act was passed, taxpayers who had reached age 70 ½ were not eligible for a retirement contribution deduction on their individual return. This was a disadvantage for these taxpayers, who more and more are working past the arbitrary “retirement age.” As of January 1, 2020, the restriction has been lifted and taxpayers of any age may receive a deduction for contributing to a qualified retirement plan.

However, taxpayers should be aware that contribution deductions after age 70 ½ reduce the exclusion from income dollar-for-dollar for qualified charitable distributions (which is to say, direct distributions from a retirement account to a qualified charity, which is ordinarily excludible from income).

Additionally, the retirement age for Required Minimum Distributions (RMDs) has been raised from age 70 ½ to 72, reflecting an increase in American life expectancy since the original rules were passed. Please note- The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 ½ in 2019 and would have had to take the first RMD by April 1.

Treatment of Inherited Retirement Plans

Under the old rules, inherited retirement plans and IRAs had RMD rules dependent on whether the account holder had a designated beneficiary, and whether the account holder had reached the RMD age at the date of death. The new law standardizes the treatment of inherited IRAs and defined contribution plans when an account holder dies after January 1, 2020.

Irrespective of when an account holder dies compared to the RMD beginning age, the entire balance in the account must be distributed to designated beneficiaries within ten calendar years from the date of death (the “10-year rule”), with no requirement to take distributions annually.

The 10-Year Rule and Qualified Designated Beneficiaries

However, there is an exception to the 10-year rule – when the designated beneficiary is a “qualified designated beneficiary.” This is an individual who meets one of the following conditions:

1. a surviving spouse of the account holder
2. a child of the account holder who has not reached the age of majority
3. a “chronically ill individual” under certain legal definitions, or
4. any other individual who is not more than ten years younger than the account holder.

If any of these conditions are met, the account balance is paid out not over ten calendar years but is instead distributed over the life or life expectancy of the beneficiary. Upon the death of the qualified beneficiary (or if a child qualifying under condition 2 above reaches the age of majority) the balance in the account is to be paid out in accordance with the 10-year rule.

Tax Planning and Your Retirement

Proper tax planning can make all the difference for taxpayers over 70 who are trying to navigate the change in the new law. We at MRPR stand ready to assist you with retirement planning insights that will set you up for success.