The recently passed SECURE Act had good news and some bad news for IRA owners. The new rules are effective in 2020.
The Good News
Contributions Permitted After Age 70½
The SECURE Act eliminates a restriction that prevented individuals from making contributions after age 70½, even if they were still working. Beginning with the 2020 tax year, IRA contributions may continue to be made by eligible individuals without any maximum age limit. However, the basic requirements to make IRA contributions have not changed — they must still be based on earned income. Contributions may not be made from investment income. Contributions may or may not be deductible, as under the pre-SECURE Act rules.
Required Minimum Distributions Delayed Until 72
IRA owners were required to begin drawing distributions beginning by the April 1 following their attainment of age 70½. The SECURE Act changes this required beginning date to April 1 following age 72 for IRA owners who were not 70½ or older on December 31, 2019.
Qualified Charitable Distributions May Still Be Made at 70½
Qualified Charitable Distributions have been a way to avoid tax on a required minimum distribution (RMD) of up to $100,000 by contributing it to charity. The SECURE Act still permits these to be made at 70½, though they will not count later toward required minimum distribution requirements.
Any IRA owner contemplating taking a qualified charitable distribution, while making IRA contributions, should consult an adviser about the impact.
The Bad News
Stretch IRAs Eliminated for Many Beneficiaries
Under prior law, non-spouse beneficiaries were permitted to “stretch” post-death distributions over periods up to their life expectancy. The SECURE Act now requires many non-spouse beneficiaries to receive all distributions within 10 years following the IRA owner’s death, regardless of whether distributions had commenced. There is no requirement that distributions be made ratably over the 10-year period; everything could be withdrawn in year 10.
Surviving spouses are still permitted to defer payments until they attain age 72 and to receive payments over their life or life expectancy. Beneficiaries fewer than 10 years younger than the IRA owner, beneficiaries who are disabled or chronically ill, and minor children are not subject to the new 10-year requirement. The 10-year distribution period for minors does not begin until they are age 18. The 10-year distribution period also will apply to trusts, which could previously use the life expectancy of the oldest beneficiary.
The new rules generally apply if the IRA owner dies after December 31, 2019. However, annuity contracts already purchased are grandfathered.
Reviewing Beneficiary Designations and Estate Plans
The SECURE Act will require the revision of some estate plans and beneficiary designations. The rules for spousal beneficiaries have not changed, but IRA owners with non-spouse beneficiaries may wish to consult their estate planning advisers about the impact of this change and the use of trusts in their estate planning.