SECURE Act and IRAs: New Rules Mean New Opportunities and Challenges

Family, Executive & Entrepreneur Advisory Services Team

Key changes affecting Individual Retirement Accounts (IRAs) and Required Minimum Distributions (RMDs)

The December 2019 passing of The SECURE Act provides for new planning opportunities and challenges for retirement plans starting in 2020.

The SECURE act, which stands for “Setting Every Community Up for Retirement Enhancement”, was signed into law by President Trump as part of a spending bill at the beginning of 2020. Its focus was to update and impact rules around the creation and maintenance of retirement plans. This article provides a high-level overview of some of the key changes affecting Individual Retirement Accounts (IRAs) and Required Minimum Distributions (RMDs).

No age restrictions for contributing to a traditional IRA

Prior to the act, individuals were forced to stop making contributions to their traditional IRAs once they reached the age to start taking required minimum distributions, regardless of their employment status. Under the new law, an individual can continue to contribute to their traditional IRA, regardless of age, so long as they continue to have earned income.

• Note: There are additional factors in determining the deductibility of a contribution to a traditional IRA, consult your tax advisor to determine the specifics of your situation.

Change in the Required Minimum Distribution Age

For the first time since the 1960s, the age at which RMDs are required to start has been changed. Before the SECURE Act 70.5 was the triggering age, but the new age to begin taking RMDs is now 72. Two important points on RMDs:

• If you turned 70.5 in 2019 you are not affected by the change and are required to take your first RMD by April 1, 2020. For anyone born after June 30, 1949, your RMDs do not start until the year in which you reach age 72.
• In order for your distribution to count as an RMD, it is required that it not be taken prior to your birth date in the year in which you reach RMD age. Therefore, if you turn 72 on November 11, 2025, and take a large distribution in January of 2025, that distribution will not count towards meeting the required distribution amount for 2025. Only funds taken from the account after reaching age 72 will count towards meeting that requirement.
• Note: You can withdraw funds out of an IRA before reaching the RMD age, but such distributions are not mandatory and may, in fact, cause a penalty to be assessed if certain rules and/or age 59.5 are not followed.

Qualified Charitable Distributions

One tax saving strategy available to those who are charitably inclined is to make distributions from their IRA directly to a charity. Referred to as Qualified Charitable Distributions (QCDs) these distributions count towards one’s annual RMD and have the added benefit of being excluded from taxable income. By not personally receiving the funds from the IRA and instead redirecting those to a qualified charity, the taxpayer can exclude up to $100,000 of ordinary income being distributed from their IRA. This was true both before and after the passing of SECURE. Be aware that

• Notes:
  -An individual must be age 70.5 to make a QCD and both taxpayer and spouse, if of appropriate age, can make a QCD for $100,000 each.
  -Because taxpayers are now eligible to continue making tax deductible contributions beyond the age of retirement, the tax excludable portion of the QCDs could be limited. Therefore, if you are making tax deductible contributions to an IRA in the same year you are making QCDs, check with your tax advisor to ensure you are planning accordingly.

Stretch IRAs

When someone inherits an IRA due to the death of an IRA owner, the beneficiary is required to begin taking RMDs, regardless of the beneficiary’s age. Prior to the new law, most beneficiaries had the option to “stretch” their distributions over their lifetime/life expectancy. Under the SECURE act, this option is limited for most non-spousal beneficiaries to 10 years. There are certain exceptions to the 10-year payout timeframe. If you are the beneficiary of an IRA, talk to your tax professional to determine if any of these exceptions apply to your situation. Careful planning by those leaving IRAs to non-spouse beneficiaries should be considered as the impact of large IRA RMDs over a condensed 10-year period could create tax inefficiencies.

Interested in learning about tax planning opportunities for your personal retirement needs? Contact your Keiter representative or Email | Call 804.747.0000. Our Family, Executive & Entrepreneur Advisory Services Team can help.

Additional Resources for Retirement Planning

• IRA and Retirement Plan Changes in the 2019 Budget Act
• 2020 Cost of Living Adjustments for Pension Plans
• How does Social Security Fit into your Retirement Plan?