On December 20, 2019, President Donald J. Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) into law.
If you have a retirement account and/or if you anticipate being named as a beneficiary of a retirement account, here is a summary of what you need to know about the new rules and their limited exceptions.
The SECURE Act contains some new taxpayer-friendly provisions. If you are part of a retirement plan, you are now free to continue making contributions to the retirement plan at any age. You are no longer prohibited from making retirement contributions after age 70½. Also, under the pre-SECURE Act rules, you were required to begin taking required minimum distributions (thus paying income tax on those distributions) in the year following the year in which you turned 70½ years old. Under the new rules of the SECURE Act, that age changes to 72 so you are not required to begin taking required minimum distributions from your retirement accounts until the year following the year in which you turn age 72.
Now, for some new not-so-taxpayer-friendly changes. It is estimated the SECURE Act will generate an additional $15.7 billion in tax revenue to the federal government. In large measure, this new tax revenue will be generated because the required time for the beneficiaries to take distributions after the death of an account owner has been drastically shortened. The few exceptions are described below. These changes apply only to retirement accounts of people who die after December 31, 2019.
But, before considering the changes, note that the rules concerning a surviving spouse have not changed: If a spouse is the beneficiary, after the account owner’s death the account can still be rolled over into an IRA owned by the surviving spouse.
For a beneficiary who is not a surviving spouse, the rules, with some exceptions, have changed dramatically. Under prior law, a beneficiary could elect to take required minimum distributions over his or her life expectancy pursuant to the IRS Table (the so-called “stretch rule”). In this way the stretch rule significantly enhanced the potential to defer income tax for retirement accounts, as taxpayers could obtain a huge extension of the tax-deferral period. The impact of the stretch rule could be further magnified if grandchildren were designated as beneficiaries. A similar result could be obtained by naming a See-Through Trust as the designated beneficiary of the account. The inherited account stretch rule was largely repealed by the SECURE Act.
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