What is the SECURE ACT?

The SECURE ACT is the “Setting Every Community Up for Retirement Enhancement” Act passed as part of the Federal Government spending package titled the “Further Consolidated Appropriations Act, 2020, does more than just fund the government.

When Must I take out my Required Minimum Distributions (RMDs)?

Generally, RMDs must be taken by April 1 following the calendar year in which the participant reaches age 72 (or 70 ½ if the participant turned age 70 ½ prior to January 1, 2020). For 401(k) plans, the date can be when the participant retires, if later.

Example – Age 70 ½: If you are retired and have reached age 70½ by 12/30/19, Your first RMD (for 2019) must be paid by April 1, 2020, and your Second RMD (for 2020) must be paid by December 31, 2020.

Example – Age 72: If you are retired and reach 70 ½ after 2019, Then, NO RMDs until the year you turn 72 and the RMD must be paid by April 1st of the following year.

Can I contribute to an IRA after 70 ½?

The SECURE ACT eliminated the age 70 ½ limit for making traditional IRA contributions, so that anyone can contribute to an IRA as long as they are working. This now matches the existing rules for 401(k) plans and Roth IRAs.

Example: Jack is 75 and working. Since he is working, he can contribute to his IRA. Jack will also have to take out his required minimum distribution since he is past age 72.

Can I withdraw from my IRA account for birth related expenses and be exempt from 10% Early Withdrawal Penalty?

There is now an exemption from the 10% tax penalty on early retirement account withdrawals of up to $5,000 to pay for expenses related to the birth of a child or adoption within one year of the birth of a child or adoptions becoming final. Each parent can qualify for this exemption. Notwithstanding, the funds withdrawn from a Traditional IRA account will still be subject to income taxation.

As a Part Time Employee, can I Contribute to a Qualified Retirement Plan?

Yes, you may be able to contribute to a Qualified Retirement Plan if you have worked at least: 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours. This rule applies to plan years after December 31, 2020; however, for purposes of the meeting the hours worked requirement, years worked beginning before January 1, 2021 are not taken into account.

For Inherited IRAs, when must the IRA be distributed to the beneficiary?

If a designated beneficiary, the general rule is 10 years and for non- designated beneficiaries, the rule is 5 years.

Who is a Designated beneficiary?

A Designated Beneficiary is individual or group of individuals who are named as beneficiaries of an IRA or a trust so named as a beneficiary if the trust meets certain IRS requirements.

Which IRAs are subject to the Five-Year Rule?

A beneficiary who does not qualify as a Designated Beneficiary is subject to the Five Year Pay Out Rule such as the estate of the participant, a charity or a trust that does not qualify as a “See- through Trust”.

What is a See-Through Trust?

A See-Through Trust is a trust for IRA distribution purposes, the trust must meet the following four requirements:

  1. The trust is valid under state law or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.
  3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.
  4. The required trust documentation has been provided by the trustee of the trust to the plan administrator no later than October 31st of the year following the year of the IRA owner’s death

For Inherited IRAs, under the new Rules, can any of my beneficiaries still qualify for the "Stretch IRA"?

Yes, Eligible Designated Beneficiaries (EDBs) can qualify for the stretch pay out (a payout over the lifetime of the EDB).

Who can qualify as an Eligible Designated Beneficiary?

The following individuals can qualify as a “Eligible Designated Beneficiary (EDB)”:

  • Surviving Spouse
  • Minor Child of the Participant but only during the period the beneficiary is a minor
  • Disabled Beneficiary
  • Chronically Ill Beneficiary
  • Beneficiaries who are not more than 10 years younger than the original account owner

What is a Stretch IRA?

Under prior law, a Stretch IRA is an Inherited IRA which allows certain beneficiaries the opportunity to stretch the payout of an Inherited IRA over his or her lifetime. This is an exception to the five-year rule and the pay-out is based on life expectancy of the beneficiary at the time of the inheritance.

Under the SECURE Act, a Stretch IRA is only available to Eligible Designated Beneficiaries, otherwise the 10-year rule would apply to a Designated Beneficiary.

How does the 10 Year Rule harm my beneficiaries?

Beneficiaries of Inherited IRAs will have to pay income tax:

  1. over a shorter period of time,
  2. often at a higher tax rate, and
  3. without the benefit of additional growth earned during a longer period of deferral

How are Trusts treated for purposes of the RMD Rules?

Depending upon the trust, the required distribution may be within 5 or 10 years. If all the beneficiaries are individuals, the 10- year rule would apply.

An exception to the 10- year rule applies to a Trust for the benefit of a Disabled or Chronically Ill beneficiary (as long as certain requirements are met). In such event, the payout can be over the life expectancy of the Disabled or Chronically Ill beneficiary.

What are the benefits of using a Trust for a Designated Beneficiary?

Trusts may be used to provide Asset Protection for the beneficiary who:

  1. is a Spendthrift,
  2. has Creditor Claims, or
  3. is on or is applying for Government benefits.

What are the Benefits of using a Trust for a Disabled or Chronically Ill Beneficiary?

An Accumulation Trust for a Disabled or Chronically Ill Beneficiary will protect the IRA distributions to the Trust while allowing the beneficiary to maintain or qualify for government benefits such as Medicaid or SSI.

What is an Accumulation Trust?

An Accumulation Trust is a Trust that can “accumulate” retirement plan distributions for a possible later distribution to another beneficiary. The Trust would receive the minimum required distributions from an Inherited IRA and then distribute the funds to or for the benefit of the beneficiary, as and when determined by the Trustee, in the Trustee’s discretion.

This trust can be used to protect the funds from creditor claims against the beneficiary. In addition, the funds in the Trust may not be counted against the beneficiary when qualifying for Medicaid or SSI.

Will a Conduit Trust still work for the Lifetime Stretch?

Under the SECURE Act, a Conduit Trust will still allow for Eligible Designated Beneficiaries such as a spouse to receive the lifetime Stretch on an Inherited IRA account. For a Minor Child, the lifetime expectancy payout does not last for the child’s entire life but only until he/she reaches age of majority.

Designated Beneficiaries who are not Eligible Designated Beneficiaries of a Conduit Trust will be subject to the new 1O-year payout rule.

What is a Conduit Trust?

A Conduit Trust is a Trust that requires the Trustee to distribute the annual minimum required distribution received from the Inherited IRA to a trust beneficiary, who must be an individual.

Does the SECURE ACT apply to 401K plans?

Yes, the SECURE ACT applies to 401(k) plans as well as 401(a), 403(b) and government 457(b) retirement plans.

When is the SECURE ACT effective?

The SECURE ACT applies to distributions with respect to IRA account owners who die after December 31, 2019. For pre-2020 deaths, the SECURE ACT also applies if the designated beneficiary dies prior to his/her life expectancy.