The SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) (SECURE), which was signed into law on December 20, 2019, and which took effect on January 1, 2020, changes several familiar and fundamental rules governing the administration and taxation of individual retirement accounts (IRAs).
1) IRA participants who are still working may continue to contribute to their accounts past age 70-1/2. The prior age 70-1/2 limit on further employee contributions has been eliminated.
2) IRA participants must take required minimum distributions (RMDs) from their accounts beginning at age 72, up from age 70-1/2.
3) The stretch distribution rules applicable to the beneficiaries of a participant’s IRA have, with certain important exceptions, now been eliminated in favor of a 10-year payout. The result is that many beneficiaries will now be forced to distribute their inherited IRAs sooner and at higher tax cost than would previously have been the case.
Three Classes of Beneficiaries
For decedents dying on or after January 1, 2020, there are three classes of inherited IRA beneficiaries under SECURE:
• Designated Beneficiaries — Individuals or trusts that qualify as “see-through” trusts. Designated beneficiaries must withdraw their inherited IRAs over 10 years’ time.
• Eligible Designated Beneficiaries — A subset of designated beneficiaries that includes 1) the surviving spouse of the participant; 2) a person who is not more than 10 years younger than the participant; 3) a minor child of the participant; 4) a disabled individual; or 5) a chronically ill individual. Eligible designated beneficiaries may stretch distributions over their lifetimes; but upon the death of the eligible designated beneficiary, the inherited IRA must be paid out within 10 years.
• Non-Designated Beneficiaries — Estates, charities, or trusts that do not qualify as “see-through” trusts. Non-designated beneficiaries must pay out the inherited IRA within five years’ time (if the participant died before his or her required beginning date, now age 72) or over the deceased participant’s remaining life expectancy (if the participant died after his or her required beginning date).
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