the SECURE act

What is the SECURE Act and what does it change?

Congress passed the SECURE act in December of 2019 and it took effect January 1, 2020. SECURE stands for Setting Every Community Up For Retirement Enhancement. It makes important changes to the rules governing IRAs, 401ks, and other retirement accounts.

Some terms I will be using in this blog:

Participant:

One who contributes to a tax-qualified retirement plan

Required Minimum Distribution:

The smallest amount which must be taken out of a retirement account each year to avoid tax penalties


Decedent:

a participant who has died


Beneficiary:

the named recipient of the retirement account (after the death of the decedent)

Some changes under the SECURE Act are more generous, or better for the taxpayer.

The law raises the age at which a taxpayer must begin taking distributions from 70 ½ to 72 (unless you happened to turn 70 ½ in 2019. If so you would use the old rules of beginning distributions in 2019.

Another change that favors the taxpayer is the removal of the upper age limit for making contributions. You still must be a worker and contribute earned funds to the IRA or other account, but you can continue to contribute to any age as long as you are still employed. This provision will help the many seniors who continue to work beyond retirement age.

Now we come to the negative parts of the SECURE Act.

Most beneficiaries of retirement accounts (other than a spouse) will now be required to drain the account within 10 years. Previously an IRA beneficiary such as a child would get to re-set the required minimum distribution schedule to his or her life expectancy. Now there are very limited exceptions to the 10 year payout requirement.

The biggest exception is the spouse. A spouse will still get to re-set the distribution schedule, regardless of the amount of years in age difference.

Another exception is a minor child. The child of a participant who has not reached the age of majority (18 in Florida) will get to defer distributions until he or she reaches that age. At that time the 10 year payout is also imposed on the child.

Also, if the participant had a dependent named as beneficiary, that dependent might qualify to defer distributions. If the dependent is “disabled” or “chronically ill” he or she would not be subject to the ten year required payout. “Disabled” is much like the definition to receive disability benefits under the Social Security program (no gainful employment is possible). “Chronically ill” means that the person needs assistance with two or more of their activities of daily living and this need for assistance is expected to be lengthy, according to a doctor, nurse or licensed social worker.

Finally, the act also exempts any beneficiary who is less than ten years younger than the deceased participant.

Since all of the negative impacts relate to beneficiaries, there will be no harm to you if you plan to withdraw and use all of your tax-deferred retirement plan money during your life. The SECURE act will have the biggest impact on wealthier people who do not need their IRAs for their own expenses. Remember to periodically review who you have listed as your beneficiary!

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