On Tuesday, December 17, 2019, the House of Representatives passed a $1.4 trillion spending bill that included the SECURE Act (Setting Every Community Up for Retirement Enhancement). The Bill now heads to the Senate where approval is expected and then on to President Trump who is expected to sign the legislation into law. If enacted, the tax law changes outlined in the SECURE Act would apply to tax years beginning after 2019.
Among other tax law changes, the SECURE Act would include the following changes to current tax law surrounding contributions to and distributions from retirement plans:
1. Timing of Required Minimum Distributions from IRAs and Qualified Retirement Plans
If enacted, the SECURE Act would change the beginning date for Required Minimum Distributions (RMDs) from IRAs and Qualified Retirement Plans from age 70-1/2 to age 72. Originally, the age of 70-1/2 was first applied in the retirement plan context in order to ensure that retirees spend their retirement savings during their lifetime by requiring a minimum withdrawal from their retirement plans. However, this age of 70-1/2 was first enacted in the early 1960s and has never been adjusted to consider increases in life expectancy. In addition, the Federal Government wanted the income tax due on these withdrawals from retirement plans. Therefore, the SECURE Act increases the required minimum distribution age from 70-1/2 to 72.
2. Repeal of Maximum Age for Traditional IRA Contributions
If enacted, the SECURE Act would repeal the maximum age for making contributions to a traditional IRA account. Under current law, an individual is prohibited from contributing to an IRA account upon attaining the age of 70-1/2. As Americans live longer, an increasing number of people continue working beyond traditional retirement age. Therefore, if a person has “earned income”, such as wages or net self-employment income, he or she can make a contribution to a traditional IRA account (up to the lesser of the IRA contribution limits or earned income) even after the age of 70-1/2.
3. Elimination of “Stretch IRAs”
If enacted, the SECURE Act would eliminate “stretch IRAs” for non-spouse beneficiaries of IRAs. Under current law, if an IRA account owner dies, in certain situations, a non-spouse beneficiary of the IRA could “stretch” distributions from the IRA over his/her lifetime. However, under the SECURE Act, this would no longer be allowed. Under this new legislation, all distributions to a non-spouse beneficiary of an IRA must generally be completed within a 10-year period beginning in the year following the year the IRA owner dies. This 10-year period would apply regardless of whether the IRA owner dies before or after reaching the Required Beginning Date (RBD), age 72 under the SECURE Act. This change in law would apply to distributions made to a non-spouse beneficiary from an IRA after the death of an IRA owner who dies after December 31, 2019.
If you have any questions on how the SECURE Act may impact you, please call your DHJJ Financial Advisor at 630-420-1360, or fill out the form below.