SECURE Act Is a Win for IRA Owners - but Beware of New Restrictions on "Stretch" IRAs

New law also expands the use of 529 plans - a potentially welcome change for parents and grandparents.

If you own an IRA or other qualified retirement plan, last month Congress and the President gave you an early Christmas gift - the SECURE Act - that, while generally favorable, includes one small lump of coal.

Here are some of the highlights, starting with the good news:

No Age Restriction on Traditional IRA Contributions

Until 2020, your ability to make a tax-deductible contribution to your traditional IRA ended in the year before which you turned 70½. That's no longer the case.

Starting with this year, you can make deductible contributions up to the current-year limits ($6,000 per person, or $7,000 if you are age 50 or older), regardless of your age. (There has never been an age limit on Roth IRA contributions, and that's still the case.)

RMD Delay

For people who will reach age 70½ in 2020 or later, the SECURE Act raises the starting age for required minimum distributions (RMDs) from the year in which they reach age 70½ to the year in which they turn 72.

RMDs apply to tax-favored retirement accounts, such as traditional (but not Roth) IRAs, SEP accounts, 401(k)s, 403(b)s, etc.

See related article:  Good News for Retirement-Age Taxpayers: RMDs Are Waived for 2020

Distributions for Childbirth or Adoption

The SECURE Act creates an exception to the 10% penalty for early distributions from retirement accounts. Starting this year, a parent can take distributions of up to $5,000, penalty-free, during the first year after the birth or adoption of a child.

Expanded Use of 529 Plans

The 529 plan began as a college savings plan (with contributions deductible, subject to limits, from state income taxes) that offers tax and financial aid benefits. The scope of 529 plans was recently expanded to save and pay for K-12 tuition in addition to college costs.

• The SECURE Act takes the expansion a step further, to include:
• Fees, books, supplies, or equipment required for apprenticeship programs

Up to $10,000 used to repay student loans for the account beneficiary, plus another $10,000 for repayment of student loans for each of the beneficiary's siblings.

Employer Annuities

The new law provides new employer protections for offering annuities. It shields employers from liability when selecting an insurer. 

Restrictions on "Stretch" IRAs

Now for the bad news, which isn't too bad and doesn't apply to everyone.

Under the SECURE Act, when the owner of an IRA (traditional or Roth), profit-sharing, 401(k), 403(b) or 457(b) plan dies in 2020 or later, some beneficiaries of the account (see exceptions below) will have to distribute the account fully by December 31 of the tenth year following the original account owner's death. Prior to the SECURE Act, distribution could occur up until the original owner's death.

Exceptions to the restriction apply to the following "eligible beneficiaries":

• Surviving spouse of the decedent (the surviving spouse can continue to roll over their spouse's IRA into their own IRA)
• A minor child of the decedent (the ten-year distribution period starts when the child becomes an adult) 
• A disabled or chronically ill person
• A person who is no more than ten years younger than the decedent (we're sure there's a reason for this).

For the last two types of eligible beneficiaries, the ten-year period starts with the year of their death.

Consider a Review

The SECURE Act is the most significant piece of federal legislation concerning IRAs since 2006, and taking full advantage of its provisions or avoiding its pitfalls may warrant a review of your retirement accounts and beneficiary designations.

To schedule an appointment with Ryan Scharber or Ron Adams, call us at 480-345-8845.

(In case you were wondering, "SECURE" stands for "Setting Every Community Up for Retirement Enhancement," which might set a new standard for tortured acronyms.).