Secure Act for Qualified Retirement Plans, RMDs & Stretch IRAs

Secure Act for Qualified Retirement Plans 

In late 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was introduced into law. One of the main attributes of the SECURE Act is that it changed the required minimum distribution rules, which significantly impacts the income of taxpayers who are elderly.  There were also major changes also impacting rules involving taking distributions, along with limiting which beneficiaries qualify for the stretch IRAs. Let’s take a brief look at some of the basic changes that took place under the SECURE Act.

Required Minimum Distributions (RMD)

In general, Required Minimum Distributions (RMD) is taken soon after a person reaches the age of 70 ½. Before the Secure Act was introduced, if a person reached the age of 70 ½ in 2019 then they would have to take their first RMD by April 1, 2020. Under the new rule, taxpayers to reach the age of 70 ½ in 2020 or thereafter are not required to take their first required minimum distribution until they reach the age of 72. This provides the Taxpayer with more time before having to take the RMD and also provides the opportunity for further growth within the plan before having to draw it down.

• • • “Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

    • However, the age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. The bill increases the required minimum distribution age from 70 ½ to 72.”

10-Year Rule: Modification of the Stretch Option (For Some)

One major change under the SECURE Act is that retirement accounts for designated beneficiaries after a person passes away must be emptied out by the end of the 10^th year after a person passes away. In other words, once a person passes away, the beneficiaries of the retirement accounts have 10 years in order to empty the account. Prior to the SECURE Act,  the stretch provision — which would allow many beneficiaries to stretch the IRA by taking minimal withdrawals over the lifetime of the beneficiary — became more limited. 

Stretch IRAs are Still Possible for Some Beneficiaries

The stretch IRA is still possible for some beneficiaries, including surviving spouses and those who are disabled or chronically ill:

• • • “The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner.

    • Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.”

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