By Rick Rubin, CFA

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law by President Trump on December 20, 2019.  The legislation is designed to allow more individuals to access workplace retirement plans and to increase retirement savings.  It will impact defined contribution plans, defined benefit plans, individual retirement accounts (IRAs), and 529 plans.  Many of the provisions became effective on January 1, 2020.

The SECURE Act encourages more small businesses to offer retirement plans, expands availability of these plans to employees, and makes significant changes to IRAs and retirement plans including:

• Increases the beginning age for Required Minimum Distributions (RMDs) from 70 ½ to 72.
• Eliminates an age limitation for Traditional IRA contributions.
• Significantly changes inherited IRA and retirement plan RMD amounts for most non-spouse beneficiaries starting in 2020.

RMD age raised to 72 Years Old

The SECURE Act raises the age for beginning RMDs to 72 for all retirement accounts subject to RMDs.  This means that those reaching age 70 ½ in 2019 need to continue to take RMDs in 2020. Retirement account owners reaching age 70 ½ in 2020 will not have to take their first RMD in 2020 now that the RMD deadline has been extended to age 72.

Separately, the Internal Revenue Service (IRS) recently proposed changes in the RMD life expectancy tables beginning in 2021.  These proposed changes combined with the new RMD age will allow many account owners who do not need the funds to keep them growing tax deferred a little longer.

Age Limit Eliminated for Traditional IRA Contributions

Beginning January 1, 2020, the new law eliminates the age limit for traditional IRA contributions.  Before the SECURE Act, there was an age cap for contributing to a traditional IRA of age 70 ½.  Individuals who are still working and have earned income can continue to contribute to a traditional IRA, regardless of their age.  However, individuals who were over 70 ½ and had earned income in 2019 are not permitted to make prior year contributions for tax year 2019.

Most non-spouse beneficiaries will receive retirement account assets within 10 years

Beginning for deaths after December 31, 2019, the ability to stretch IRA and retirement account RMDs over a beneficiary’s life expectancy is replaced with a ten-year rule for most non-spouse beneficiaries. The rule requires accounts to be emptied by the end of the tenth year following the year of the account owner’s death. There are no annual RMDs. Instead, the only RMD on an inherited IRA and retirement account is the balance at the end of the 10 years after death. For deaths in 2019 or prior years, the old rules regarding inherited IRAs and retirement accounts would remain in place.

There are five groups of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still stretch RMDs over life expectancy.  These include surviving spouses, minor children, up to age of majority (age 18 in most states), a disabled or chronically ill individual, and beneficiaries who are less than ten years younger than the decedent (generally siblings about the same age).  Non-individual beneficiaries like estates and trusts have a five-year period to distribute all assets.

Key Considerations

1. Review your beneficiary designations on all IRA and retirement plans
   1. Individuals most likely impacted are those with large retirement accounts naming their children and grandchildren as beneficiaries
   2. Review immediately with your attorney if you named a trust as a beneficiary
   3. Spousal rollovers may be more valuable for tax deferral
2. Consider making an IRA contribution if you are still working and have earned income
   1. You may be entitled to make a $6,000 IRA contribution (plus $1,000 catch-up contribution at age 50 and over)
   2. Also consider a spousal IRA contribution up to $7,000 for non-working spouse (age 50 and over)
3. Roth IRA conversions may be an important estate planning tool
   1. Review with your accountant your eligibility to make IRA contributions, Roth conversions, and any potential tax consequences
4. Qualified Charitable Distributions (QCDs) from IRA accounts are still allowed
   1. QCDs are allowed up to a maximum potential tax-deductible amount of $100,000.
   2. The deductibility of the QCD may be impacted for an IRA account owner over age 70 ½ who makes a tax-deductible IRA contribution.
5. Student loan repayment through 529 savings Plans
   1. Individuals can withdraw up to $10,000 total (not annually) from 529 savings plans to make student loan payments. This also applies to siblings of 529 account beneficiaries.

These new rules provide a great reason to review your estate planning.  Please reach out to your Tufton investment advisor, attorney, and/or accountant with any questions.  Tufton has provided highlights of the SECURE Act’s provisions we consider most important for our clients, prospects and readers.  Given the short turnaround, we expect that the IRS or other government authorities will provide guidance on the implementation of the rule changes.  This article is not intended to be a comprehensive review of each of the Act’s provisions.  

Tufton Capital Management, LLC (Tufton) is a Registered Investment Advisor with the U.S. Securities Exchange Commission.  Tufton cannot provide legal advice or tax recommendations.  Accordingly, we recommend that you consult with your attorney and/or accountant for any legal and tax matters.