By Ian Berger, JD
One year ago from yesterday (December 20, 2019), President Trump signed into law the SECURE Act. At that time, virtually no one had heard of the coronavirus and certainly very few (if any) could have foreseen the global pandemic that’s still very much with us. The onset of the pandemic led Congress last March to also pass the CARES Act, which included certain emergency relief provisions for IRAs and company plans.
Because of the CARES Act, the significance of the SECURE Act has been overshadowed. But while the CARES Act retirement plan relief will expire by the end of this year, the SECURE Act will have significant long-range ramifications.
So, for those of you who may have forgotten, here’s a refresher course on the most important SECURE Act changes:
1. Eliminating the age 70 ½ limit for IRA contributions. Effective for 2020 contributions, those of you 70 ½ or older have the same opportunity as younger folks to make traditional IRA contributions. One indirect (and probably unintended) consequence of this change is that older persons who earn too much to make Roth IRA contributions directly can now use the “backdoor” method to make a traditional IRA contribution and convert it to a Roth IRA.
2. Raising the RMD age to 72. If you were born after June 30, 1949, you can delay required minimum distributions (RMDs) until the year you reach age 72. (You can even further delay your first RMD until the following April 1, but then you’d have two RMDs due in that following year.) For individuals born before July 1, 1949, age 70 ½ is still the first RMD year.
3. Allowing withdrawals for qualified births or adoptions. Starting this year, IRA owners or plan participants can make penalty-free withdrawals of up to $5,000 for each newborn or adopted child. (Married couples can each take up to $5,000 for the same child.) The funds must be taken out within one year of the birth or the adoption, but don’t have to be used for childcare expenses. Although exempt from the 10% early distribution penalty, birth or adoption withdrawals are still taxable. However, they can be repaid at any future time.
4. Promoting annuities in 401(k) plans. The SECURE Act makes it easier for companies with 401(k) plans to offer annuities as an investment option (like mutual funds) or as a distribution option (like a lump sum payment). Employees with 401(k) annuities were also given new portability options.
5. Eliminating the stretch IRA. Perhaps the most significant change was the elimination of the stretch option for most non-spouse beneficiaries of IRAs and company plans. Before the SECURE Act, beneficiaries who inherited before 2020 could spread out distributions over their life expectancy. These grandfathered beneficiaries can continue the stretch. But for most beneficiaries inheriting after 2019, the stretch has been replaced with a 10-year payout rule. That rule doesn’t require annual RMDs (like the stretch does) but does require that the entire account be paid out within 10 years of death. Only “eligible designated beneficiaries” (a surviving spouse, minor child of the account owner, disabled or chronically-ill person or someone no more than 10 years younger than the IRA owner) can still stretch out distributions.
So, let’s raise a toast to the one-year-old SECURE Act!