The SECURE Act, which got made into law in 2019 and became effective on January 1, 2020, changed the rules about contributions to Individual Retirement Accounts (IRAs). As with other changes to federal law, the SECURE Act is complicated. You might want to talk to a California estate planning attorney about how the SECURE Act could affect your finances and estate plan.
An Overview of the SECURE Act
The Setting Every Community Up for Retirement Act (SECURE Act) is a bipartisan effort to make it easier for people who are not wealthy to save for retirement. Here are some of the key provisions of the Act:
- A person can continue to contribute to an IRA after the age of 70 ½ years. The individual does not have to be still employed at that point, but they must have earned income, as opposed to entirely passive income.
- People used to have to take Required Minimum Distributions (RMDs) from their defined contribution or defined benefit plan at age 70 ½ – or more precisely, by April 1 of the year after they turn 70 ½. The SECURE Act makes the RMD age 72 for everyone who turned 70 ½ after December 31, 2019.
- The amount that a person contributes to an IRA after the age of 70 ½ will reduce the amount of the annual qualified charitable distribution that an individual can make during that tax year. The standard annual qualified charitable distribution limit is $100,000.
- The SECURE Act created the “10-Year Distribution Rule.” Other than a surviving spouse, everyone who inherits proceeds from a traditional IRA or a Roth IRA must take a distribution of the entire account within 10 years of the death of the person who owned the retirement account. This rule does not apply to minor children until they reach the age of majority, people who are disabled or chronically ill, or beneficiaries who are within 10 years of the age of the deceased IRA owner. Beneficiaries used to be able to stretch out their distributions based on their life expectancy if they elected to do so.
These changes could have an impact on the tax brackets of beneficiaries and IRA owners.
What Happens When Congress and the IRS Disagree
Although Congress wrote the SECURE Act, other government agencies can get involved after the legislation goes into effect. The Internal Revenue Service (IRS) and Congress do not always see eye-to-eye on changes in the law. In the situation of the SECURE Act, the IRS issued rulings that minimized or took away some of the benefits of the new law about IRAs.
Here are a few examples of rulings the IRS issued that take some of the wind out of the SECURE Act’s sails:
- IRA custodians (banks and other financial institutions) do not have to accept IRA contributions from anyone over the age of 70 ½. The custodian of the IRA does not have to give a reason for the denial, and there is no circumstance in which the individual who owns the IRA can force the financial institution to accept the contribution.
- The IRS imposed extra work on IRA custodians who want to accept contributions to IRAs from people over the age of 70 ½. The bank will have to amend the IRA contract and update the disclosure agreements.
A California estate planning attorney can help you evaluate whether you should make adjustments to your estate plan because of the SECURE Act. Contact us today.