SECURE ACT (Setting Every Community Up for Retirement Enhancement Act) of 2019 and the New Rules for IRA and Qualified Plans

Effective date 1/1/2020

Here is some basic information about the new SECURE Act.  There are still a lot of unanswered questions about the new ACT and this information is incomplete and will need to be revised as we become more familiar with the new law. 

Basic Rules

  • Unless the beneficiary qualifies as an Eligible Designated Beneficiary, he or she must withdraw the funds within 10 years of the account holder’s death
  • Contributions to these plans are excluded from income when made and grow in the plan tax free
  • Distributions are taxable when withdrawn
  • No changes to Roth IRAs
  • The SECURE Act changes how the Internal Revenue Code treats qualified plans (401(k), 403(b), SEP-IRA, Simple IRA) and IRAs

Begin Date of Required Minimum Distributions

  • Increases from age 70 ½ to age 72
  • People are working and living longer
  • must begin RMDs by April 1st of year following the year you turn 72
  • if you reached age 70 ½ by 12/31/19, you are stuck with that RMD age even if not yet 72
  • your surviving spouse can wait until age 72 to start taking RMDs as beneficiary

Age Limit Eliminated

  • The new law eliminates the 70 ½ age limit for contributing to traditional IRAs

Elimination of Most “Stretch” IRAs

  • Designated Beneficiaries:  under the old rule, a designated beneficiary (individuals or certain trusts) could elect to leave the fund in the inherited account and take distributions based on his or her own life expectancy (stretch)
  • Non-designated beneficiaries:  under the old rule and the new rule, charitable organizations and nonqualified trusts must withdraw the funds within 5 years of the account holder’s death except if the owner’s death occurs after the RMD age (now age 72) and then the benefits are paid out as they were paid to the owner or faster

    Eligible Designated Beneficiaries (EDBs):  there is now a new limited category of designated beneficiaries called Eligible Designated Beneficiaries and only EDBs can continue to elect to receive their inherited benefits over their own life expectancy.  The EDBs are:
  • a surviving spouse;
  • a disabled beneficiary: considered disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration
  • a chronically ill beneficiary:  licensed health care provider must certify to one of three things: 1) unable to perform at least to ADLs for a period of at least 90 days due to a loss of functional capacity; 2) having a level of disability similar to the disability described in 1; or 3) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment
  • individuals who are not more than 10 years younger than the account owner; or
  • minor children (not grandchildren) of the account owner; however the new 10 year period applies when the child reaches the age of majority, but the Act provides for postponement of the age of majority for a period of time while the beneficiary qualifies as a student, including college
  • Grandfathering: new RMD rules only apply to account owners who die after 12/31/19; however the new RMD rules do apply at the death of any designated beneficiary of an inherited IRA who dies after December 31, 2019
  • Example:  if an employee died in 2016 leaving his spouse as the designated beneficiary, the spouse may take RMDs over the designated beneficiary’s life expectancy; but when the spouse dies after 12/31/19, the beneficiary named by the spouse must take the distributions within 10 years (even if the beneficiary is disabled, chronically ill or a minor)

© 2/13/2020 O’Connor & Rivard Attorneys PC, Attorney Brenda M. Rivard. This is for informational purposes only and is not intended as legal advice and may not be relied upon as such.  You should seek the advice of an attorney before signing any legal document. Communications from this firm may contain or incorporate federal tax advice.  Under US Internal Revenue Service standards (Circular 230), we are required to inform you that only formal, written tax opinions meeting the requirements of Circular 230 may be relied upon by taxpayers for the purpose of avoiding tax-related penalties.  Accordingly, this communication is not intended or written to be used, and it cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.