New Rules for Retirement Plan and IRA Owners and Beneficiaries
By Rick Imhoff, CFP ®
The most significant retirement-related legislation since the Pension Protection Act of 2006, the SECURE Act, was recently passed by Congress and signed into law by the President. It is effective January 1, 2020 and anyone who has a retirement plan like a 401(k) or a Traditional IRA, as well as beneficiaries, will be affected.
The biggest change relates to the required minimum distribution (RMD). Previously, retirement plan and IRA owners age 70 ½ must begin taking their RMD no later than April 1st of the year following the year they turn age 70 ½. Under the SECURE Act, the new age to begin RMDs is age 72. Owners who have not reached age 70 ½ by December 31, 2019 can now delay beginning their RMD for another one or two years. This is beneficial for those owners who do not need to make distributions from their retirement plan or IRA as they can further defer taxation on those distributions. Anyone age 70 ½ before January 1, 2020, must begin taking their RMD under the old rules.
The SECURE Act has also eliminated the prohibition of making IRA contributions after age 70 ½. This is especially significant for those who wish to continue working full or part-time during their retirement. This change will allow wage earners to make IRA contributions for as long as they have earned income regardless of their age. However, if you are age 72 after January 1, 2020, you will also need to take your RMD from your Traditional IRA.
For those who are charitably inclined, under the old rules, anyone age 70 ½ with an IRA or retirement plan can make qualified charitable distributions up to $100,000 per year and not have to pay income tax on the amount distributed to the qualifying charitable organization. That rule is unchanged under the SECURE Act. For those already taking RMDs, and for those who will turn age 72 after January 1, 2020, IRA owners can satisfy part or all their RMD with one or more qualified charitable distributions. This is a significant income tax benefit for those who don’t necessarily need part or all their RMD and are unable to itemize their deductions.
The SECURE Act also changes the required payout period for beneficiaries of retirement plans and IRAs. Under the old rules, non-spousal beneficiaries could stretch out distributions over their remaining lifetime. Under the SECURE Act, the limit is now 10 years, but there are a few exceptions. However, if a trust is named as beneficiary, it will be important to check what type of trust it is and the specific language in the trust agreement relating to the handling of IRA distributions and RMDs.
Under the SECURE Act, the 10-year payout period only really contains one RMD which is by the end of the tenth year following the year of inheritance. If the trust agreement allows only for required minimum distributions to be taken from the IRA, then there will only be one in the tenth year after the year of inheritance. This will likely result in a significant income tax issue at that time. Also, the purpose of the trust will likely not be fulfilled as it was probably planned for distributions to be spread out over the life of the trust. So, if you have named a trust as beneficiary of your IRA, you will need to review your trust agreement to be sure it will do what you intend based on the new provisions under the SECURE Act.
These are just a couple of the many changes brought about by the SECURE Act. If you have a retirement plan and/or Traditional IRAs, you should seek out professional advice to help you understand all the new rules and how they may impact your retirement and estate plan.
Rick Imhoff, CFP®, is Executive Vice President & Senior Trust Officer for MidAmerica National Bank. He can be reached at 309-647-5000, ext. 1130 or by email.
Investments are not FDIC-insured, hold no bank guarantee, may lose value, are not a deposit, and are not insured by any federal government agency.