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How the SECURE Act Changes Rules about Retirement Savings and Inherited IRAs

Published January 6, 2020

By Brian L. Miller, Esq., Littman Krooks LLP

On January 1, 2020 the Setting Up Every Community for Retirement Enhancement (SECURE) Act went into effect.  The SECURE Act will impact your retirement savings, and may also affect the estate planning that you currently have in place.

Below we’ve highlighted seven areas in which the SECURE Act may you or your family:

  • Required Minimum Distributions (RMDs) start at age seventy-two (72). Individuals who are not 70½ at the end of 2019 can now wait until age 72 to begin taking their required minimum distributions from their IRA.  This change provides you with additional time for your IRA account to grow.
  • No age restrictions on IRA contributions. This new rule allows IRA owners to contribute to their IRA after age 70 ½, and is now the same as the rules for 401(k)s and Roth IRAs which allow you to continue contributing to your IRA into your seventies and beyond.
  • Small businesses are given tax incentives to offer retirement plans for their employees. Businesses will now receive a tax credit for starting a retirement plan, and also allows businesses to join multiple-employer plans for their employees.
  • 401(K) for part time employees. Employees who work at least 500 hours per year for at least three consecutive years, and are 21 years or older by the end of the three year period, are eligible to participate in their employer’s 401(k) plan.  However, this does not apply for collective bargained (union) employees.
  • Early withdrawal of $5,000 for birth or adoption of a child. You may now withdraw up to $5,000 penalty free from your retirement account WITHOUT PENALTY in the event of the birth or adoption of child.  Prior to the SECURE Act you would incur a 10% penalty in most circumstances.
  • Qualified employer plans are prohibited from taking loans through credit card and other similar arrangements. This change is designed to prevent easy access to your retirement funds to pay for small or routine purchases, and thus hopefully preserve your retirement funds for retirement.
  • “Stretch” IRAs are eliminated. Beneficiaries (unless they fall within a limited class of people) must take distributions, withdrawing all of the money in the IRA, within ten (10) years after the IRA owner’s death.  Prior to the SECURE Act, beneficiaries could “stretch” the IRA to be paid over their lifetime, thereby taking smaller distributions at a likely lower tax bracket, while allowing the IRA principal to grow.
    • The class of individuals who can still “stretch” an inherited IRA are (i) a surviving spouse; (ii) child who has not reached the age of majority (but only until they reach the age of majority, at which point the ten year rule becomes applicable); (iii) certain individuals with disabilities and qualifying trusts; (iv) chronically ill individuals; and (v) individuals who are not more than ten years younger than the IRA owner. It must be noted that once the above individual inherits an IRA that the ten year distribution rule will apply upon said individual’s death.

Should you have any questions about the SECURE Act, or how it may affect your current estate plans, do not hesitate to contact Littman Krooks LLP to schedule a consultation.

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