Formally named the Setting Every Community Up for Retirement Enhancement Act of 2019, the SECURE Act was passed by Congress and could be signed into law very soon. When passed, it will make substantial changes to both retirement plan contribution and distribution requirements in certain situations.
The legislation was initially passed in the U.S. House of Representatives on May 23, 2019 with overwhelming bi-partisan support. Despite that, the bill languished in the Senate with many predicting that passage of the law would not occur until 2020 or later. However, to ensure the Act’s passage in 2019, it was successfully attached to a year-end government appropriations bill required to be passed to avert a government shutdown.
While there are many updates and changes in the new law, the following will likely have the greatest impact.
Currently, individuals are required to begin taking their RMDs when they reach age 70½. The SECURE Act will increase the minimum age for RMDs to 72. The previous RMD age limits were set in the early 1960s and life-expectancies have increased since that time. This change is meant to address that fact. Practically, the change can allow for tax-deferred retirement accounts to continue to grow and potentially provide more time for ROTH IRA conversions in retirement years when tax liabilities are likely lower.
As it stands, contributions to a traditional IRA cannot be made after age 70½. The SECURE Act eliminates that restriction. The change is meant to address the reality that many people are working later in their life and will provide those individuals the opportunity to contribute to a tax-deferred retirement plan. However, tax-deferred income and contribution limits for traditional IRAs will remain unchanged. It also remains unclear the tax implications for an individual older than age 72 who contributes to an IRA while also taking RMDs.
Before the SECURE Act, individuals who inherited an IRA had the option to “stretch” those distributions over a number of years based upon their own life expectancy, providing greater flexibility for distributions and tax management. Under the potential new law, all funds within an inherited IRA will have to be distributed within ten years. Depending upon the age of the beneficiary and size of the inherited account, beneficiaries may be forced to recognize significant ordinary income during periods of peak earnings. In those situations, traditional IRAs could be left to grandchildren, allowing distributions required to be taken during the ten-year period to be recognized during a time when individuals are typically in a lower tax bracket. For children of the decedent, RMDs will be deferred until they reach the “age of majority”. Additionally, the SECURE Act also excludes from the ten-year requirement non-spouses who are “not more than 10-years younger” than the decedent. In that case, if the decedent has a beneficiary close in age (e.g. a sibling) they should prioritize their IRA for that individual in their estate planning. Lastly, while the ten-year rule also applies to inherited ROTH IRAs, under most situations those distributions will be tax-free, making the case for ROTH conversions as an estate planning tool.
New laws can sometimes create more questions than answers and it may take time to fully understand the ramifications of the SECURE Act. We encourage you to speak with your wealth advisor and tax professional to understand how the new law may affect your unique situation.