The Setting Every Community Up for Retirement Enhancement — the SECURE Act — was signed into law Dec. 20, 2019. Many provisions took effect Jan. 1, 2020. The SECURE Act retirement planning changes that are most relevant in the near term include:
- A later age for required minimum distributions (RMDs): age 72 from 70 ½ previously.
- A change to the IRA stretch strategy for non-spouse beneficiaries who inherit retirement accounts.
- Elimination of the 70 ½ age limit for workers who contribute to a traditional IRA.
Required minimum distributions
The SECURE Act increases the RMD age to 72 from 70 ½ and applies to anyone who turns 70 ½ in 2020 or later.
If you don’t need income from your retirement plan or IRA accounts, the SECURE Act enables you to defer taxes from those accounts. If you want to work longer, the later RMD age provides more time for retirement-income planning.
- You turned 70 ½ in 2019: The SECURE Act does not change your RMD timing. You must take your first RMD by April 1, 2020.
- You will turn 70 ½ in 2020 or later: Under the SECURE Act, you must take your first RMD by April 1 after the year you reach age 72.
First half 2020 birthday example: Turn 70 in spring 2020 and 70½ in December 2020
- New rule - SECURE Act. Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive two extra years because of the bill.
- Former rule. Under the former rules, this person would have had to take their first RMD by April 1, 2021 — the April 1 of the year following their 70 ½ birthday in 2020.
Second half 2020 birthday example: Turn 70 in fall 2020 and 70 ½ in spring 2021
- New rule - SECURE Act. Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive one extra year because of the bill.
- Former rule. Under the former rules, this person would have had to take their first RMD by April 1, 2022 — the April 1 of the year following their 70 ½ birthday.
IRA stretch strategy in estate plans
Prior to the Secure Act, beneficiaries who inherited retirement accounts (such as a traditional or Roth IRA) could take the RMDs over their lifetime. The SECURE Act changes that financial strategy for most non-spouse beneficiaries who inherit their retirement account on or after Jan. 1, 2020. As a result:
- Most non-spouse beneficiaries must take the account proceeds (and pay the corresponding taxes) within 10 years of inheriting the account. This can be done with any number of distributions.
- Spouse beneficiaries, non-spouse beneficiaries who are no more than 10 years younger than the IRA owner and non-spouse beneficiaries who are disabled or chronically ill will continue to be able to stretch their IRAs over their lifetime.
- If a minor child inherits the IRA, the 10-year period begins when the beneficiary reaches the age of majority (the age at which a minor child legally becomes an adult, generally between 18 – 21 years old).
- A beneficiary who inherits an individual retirement account before the end of 2019 can still draw down the account over their lifetime. However, if a beneficiary inherits an IRA before the end of 2019 and dies Jan. 1, 2020, or later, that beneficiary’s beneficiary will be subject to the 10-year rule. For example:
- Allen’s son, Joe, inherits Allen’s IRA on Nov. 12, 2015. Joe takes RMDs over Joe’s life expectancy.
- On Feb. 12, 2020, Joe dies. Joe’s spouse, Fran, inherits the remainder of the IRA Joe inherited from Allen. Fran must take out the remainder of the IRA within 10 years.
The SECURE Act eliminates the 70 ½ age limit for contributions to a traditional IRA.
- There is no change for Roth IRAs, which do not have an age limit.
- As always, you must have earned income to contribute to a traditional or Roth IRA. The SECURE Act does not change that requirement.
- Special rules apply to ensure individuals who make contributions after age 70 ½ cannot also receive a qualified charitable distribution (QCD) exclusion for those amounts.
We are here to help you
How could the changes impact you? An Ameriprise advisor can help you understand what the SECURE Act means for you and provide personalized advice to adjust your retirement income plans.