Tax Planning: Retirement Plan Changes Impacted By New Law

On December 20, 2019, the President signed the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), which is part of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94). The measure was previously passed by the House on December 17^th and the Senate on December 19^th.

In this blog we will cover a few of the retirement plan changes that will likely be the most impactful.

Post-Death Required Minimum Distribution Rules Modified – The “Stretch” IRA is Mostly Dead

Under pre-Act law, the after-death minimum distributions rules vary depending on (a) whether an IRA owner (or employee as the case may be) dies before, on, or after the required beginning date, and (b) whether there is a designated beneficiary for the benefit.

New law: Generally effective for distributions with respect to IRA owners who die after December 31, 2019 (there are exceptions, however), the SECURE Act modifies the required minimum distribution rules for defined contribution plans and IRA balances upon the death of the account owner.

Under the SECURE Act, the general rule is that after an IRA owner dies, the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death.  

 This rule applies regardless of whether the IRA owner dies before, on, or after the required beginning date, unless the designated beneficiary is an eligible designated beneficiary (see below).

An exception to the 10-year rule for post-death required minimum distributions applies to an eligible designated beneficiary. This is an individual who, with respect to the employee or IRA owner, on the date of his or her death, is:

(1) The surviving spouse of the employee or IRA owner;

(2) A child of the employee or IRA owner who has not reached majority;

(3) A chronically ill individual as specially defined, and

(4) Any other individual who is not more than ten years younger than the employee or IRA owner.

Under the exception, following the death of the IRA owner, the remaining account balance generally may be distributed (similar to pre-Act law) over the life or life expectancy of the eligible designated beneficiary.

Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years after the death of the eligible designated beneficiary. After a child of the employee or IRA owner reaches the age of majority, the balance in the account must be distributed within 10 years after that date.

 Increase in Age for Required Beginning Date for Mandatory Distributions

 Employer-provided qualified retirement plans (e.g., 401(k), 403(b) or 457(b) plans), traditional IRAs, and individual retirement annuities are subject to required minimum distribution rules, which require benefits to be distributed or commence being distributed by the required beginning date (“RBD”).

Under pre-Act law, the RBD for IRAs is April 1 following the calendar year in which the IRA owner attains age 70-1/2.  There is a special rule for 5% (or more) owners.

New law: Under the SECURE Act, the RBD for IRAs is April 1 following the calendar year in which the IRA owner attains age 72.  There is a special rule for 5% (or more) owners.

 Repeal of Maximum Age for Traditional IRA Contributions

 Under pre-Act law, an individual who has attained age 70½ by the close of a year is not permitted to make contributions to a traditional IRA. This restriction doesn’t apply to contributions to a Roth IRA.

New law: For contributions made for tax years beginning after December 31, 2019, the SECURE Act repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.

If you have questions about how these new laws might impact your tax situation, or you have other questions regarding taxes, please contact Price CPAs through our website (www.pricecpas.com), by email at info@pricecpas.com, or call our office at 615-385-0686. We look forward to being of service.

Mark Fly, CPA, ABV

Tax Director

Price CPAs