The SECURE act was signed into law on 12/20/19. It’s a complicated law with dozens of provisions, but two items that affect many people are addressed in the FAQ below:
What is the SECURE Act?
The “Setting Up Every Community for Retirement Enhancement” Act is a piece of legislation designed to enhance retirement security across the country. As mentioned above, it has dozens of provisions but there are two items that stand out:
- Increasing the RMD age in a traditional IRA from 70 ½ to 72.
- Eliminating the “stretch” IRA.
What is an RMD anyway?
RMD means “Required Minimum Distribution”. It’s the minimum amount that must be distributed from a traditional IRA when the account owner reaches age 70 ½.
Age 70 ½ is a pretty goofy number. Why don’t they just drop the ½?
Well, they did. The new RMD age is 72. Without the ½.
Does this affect everyone?
No. If you reach age 70 ½ in 2019 or earlier, you would still follow the old 70 ½ RMD rules. If you reach age 70 ½ in 2020 or later, your RMD age is now 72.
What happens if you forget to take your RMD?
The penalty is severe: 50% of the amount that should have been withdrawn but wasn’t.
Can I begin withdrawing from my IRA before my RMD age?
Sure, you can begin penalty free withdrawals from a traditional IRA as early as age 59 ½. But federal and state taxes must be paid on any withdrawals.
You keep using the phrase “traditional IRA”. Do Roth IRAs have RMDs also?
If it’s your own Roth IRA – no. If it’s an inherited Roth IRA – yes. But RMDs for inherited IRAs – both traditional and Roth – work differently than RMDs from your own IRA. Read on.
What is a “stretch” IRA and why did the government want to eliminate it?
The “stretch” provision allowed a non-spousal beneficiary of an inherited IRA (traditional or Roth) to take minimum distributions over the beneficiary’s lifetime. This ability to stretch distributions over an entire lifetime can result in significant tax savings and considerable transfer of generational wealth.
Why did the government want to eliminate it? Tax-advantaged retirement plans were originally intended for the owner’s and spouse’s retirement security; they weren’t designed to pass down generational wealth. Plus, many of the provisions in the SECURE Act reduce revenue – while eliminating the stretch provision increases revenue. This keeps the SECURE Act more or less revenue neutral.
How does this law limit “stretch” IRAs?
With a few exceptions, inherited IRAs – traditional or Roth – must be distributed by the end of the 10th year following the year of inheritance. The exceptions to this “10-year rule” are:
– Spousal beneficiaries
– Disabled or chronically ill beneficiaries
– Individuals who are 10 years or younger than the decedent
– Minor children until they reach the age of majority (18 in California, at which time the 10-year rule would kick in).
Does the inherited IRA need to be distributed equally over 10 years?
No. You can take any distribution you like – even zero – as long as it is fully distributed after 10 years.
I already have an inherited IRA from someone who wasn’t my spouse. Do I now have to liquidate it in 10 years?
No. This law applies only to IRAs inherited in 2020 or later.
Should I take any immediate action as a result of this new law?
Other than recognizing your potentially new RMD age, there are two estate planning issues which should be addressed:
Do you currently have a trust listed as an IRA beneficiary?
If yes, it would be prudent to ask an estate attorney for guidance. Depending on how the trust is drafted, there could be unintended IRA distribution consequences as a result of the SECURE Act.
Do you have a large IRA with a non-spousal beneficiary?
If yes, this could result in a large tax bill for the beneficiary – even when spread out over 10 years. Consult with your financial planner and/or estate attorney for guidance on transferring generational wealth.