The SECURE Act which went into effect January 1, 2020, featured four major highlights:
- Contribution age limits to an IRA
- Age change for taking RMDs
- A new exemption for access to an IRA without penalty
- Non-spousal inherited IRAs
The IRS publication 590-B outlines the four major changes above but I’ll give you the quick scoop:
Prior to Secure Act, 70 1/2 was the max age that you could contribute to your IRA, they now allow for additions into your IRA post 70 1/2 if you have earned income. If you file a joint return, as long as the spouse has taxable compensation, you may contribute to your IRA up to the max limits.
For RMD distributions required to be made after December 31, 2019, the IRA owner may now postpone the distributions to age 72. There's talk that they may push the age even further, to 76, with SECURE Act 2.0.
Should you and your spouse have a child or adopt, the IRS now allows for an exemption up to $10,000 with no IRS 10% penalty for being under 59 1/2 to help support the new addition to the family.
The BIG talk around the SECURE Act is certainly inherited IRAs. There were no changes for spousal IRAs. They may still be treated as their own IRA and designate themselves as the account owner or roll it into their own IRA, qualified employer plan, 403b, 403a or 457 plan. No changes and straight forward from what you have been accustom to sharing. The real changes have come to non-spousal inherited IRAs.
For non-spousal inherited IRAs, recipients must now oblige with the 10-year rule. The IRS has eliminated the stretch IRA with this rule as the recipient of the inherited IRA must distribute every dollar by the 10th anniversary of receiving the IRA. Should the full value of the IRA not be distributed by the end of the 10th year, Uncle Sam will drop a 50% tax on the remaining value. There has been some debate on whether or not the recipient can place the inherited IRA into an accumulation vehicle and distribute the full value at the end of the 10th year. I have not read the ruling in that manner. We have taken the stance that an RMD must be taken on an annual basis and the remaining value must be distributed by the end of the 10th year.
There are a couple of reasons why accumulating the inherited IRA and taking a full distribution at the end of term is not valuable to your clients. The simple answer is taxes, as we have discussed in previous GRIT blog. Where are taxes heading - down or up? I have coined or created “The New Stretch IRA” which allows for your clients to stay within the 10-year distribution window, provide the recipient with a 50% tax savings and finally, have converted the full IRA into a lifetime of non-taxable income.
Give me a call, lets discuss an inherited case you are working on and I will share the secret sauce to tax savings and lifetime income!