Passed in December 2019, the SECURE Act provides good news to IRA owners, expands the use of 529 plans, but restricts the “Stretch IRA.”

Passed by Congress last month and signed into law by President Trump, the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act of 2019 is the most significant legislation to affect retirement plans and IRAs since 2006.

While making favorable changes for IRA owners and expanding the benefits of tax-free distributions from 529 plans, the SECURE Act has reduced, with several exceptions, the period of tax-free distributions of retirement benefits to non-spouse beneficiaries.

1. Age for Required Distributions Increased to Age 72

Effective for individuals who will reach age 70½ after December 31, 2019 (i.e., anybody born on or after July 1, 1949), the required beginning date to commence receiving minimum distributions (RMDs) from an IRA or retirement plan is April 1 following the calendar year in which the individual attains age 72 (up from 70½). This rule does not apply to Roth IRAs, which have no required beginning date during the life of the account holder.

However, if you are still working for an employer and you don’t own 5% or more of the employer, then your required beginning date from your employer’s retirement plans (not your IRAs) will be the later of April 1 following the calendar year in which you (a) attain age 72 or (b) terminate employment. Even if working beyond age 72, you still need to commence receiving minimum distributions from your IRAs

2. No Age Limit on Contributions to Traditional IRAs

Effective for deductible or non-deductible contributions made to a traditional IRA for the 2020 calendar year and thereafter, the prohibition on contributions by individuals age 70½ or older is repealed. There has never been an age restriction on contributions to a Roth IRA. 3. Elimination of the Stretch IRAThis is the biggest change. Congress needs money and has long considered how to tax the trillions of dollars in retirement plan assets. Hence, the SECURE Act’s “Revenue Raiser” portion reduces to ten years (instead of the life expectancy of the individual) the period following the death of the employee or IRA holder during which distributions must be made to a non-spouse individual (or to a trust) from certain retirement plans or IRAs.

3. Elimination of the Stretch IRA

This is the biggest change. Congress needs money and has long considered how to tax the trillions of dollars in retirement plan assets. Hence, the SECURE Act’s “Revenue Raiser” portion reduces to ten years (instead of the life expectancy of the individual) the period following the death of the employee or IRA holder during which distributions must be made to a non-spouse individual (or to a trust) from certain retirement plans or IRAs.

This means that the entire interest in the retirement plan or IRA must be distributed to the beneficiary (see exceptions below) no later than December 31 of the tenth full calendar year following the death of the employee or IRA holder.

This change is effective with respect to individuals who die after December 31, 2019. Note that the change affects only IRAs (including Roth IRAs) and “individual account” retirement plans such as profit sharing, 401(k), 403(b) and 457(b) plans.

This change does not affect benefits payable from a defined benefit plan, which are typically paid in the form of a lifetime annuity.

Congress’s reasoning for this reduction of the pay-out period (other than admitting within the SECURE Act itself that the change is a “Revenue Raiser”) is that distributions from retirement plans and IRAs to a non-spouse are an inheritance and have nothing to do with retirement. The individual who participated in the retirement plan or who has an IRA has done so to secure his or her retirement and, if married, the retirement of his or her spouse.

Congress has concluded that non-spouse beneficiaries do not have a similar claim, and that receiving retirement benefits from a non-spouse’s plan or IRA does not relate to their retirement. Thus, they should not be allowed to “stretch” the payments beyond ten years.

Exceptions to the New Rules. Distributions can still be made over the life expectancy of certain “eligible designated beneficiaries,” i.e., the following individuals (or certain trusts for the individuals):

• The beneficiary is a surviving spouse. In addition to permitting distributions over the life of the surviving spouse, the SECURE Act did not alter the surviving spouse having the option to roll over tax-free the deceased spouse’s benefits to the surviving spouse’s retirement plan or IRA, at which time the rolled-over benefits are treated as the surviving spouse’s benefits.
• The beneficiary is a child of the deceased employee or IRA holder and has not reached the age of majority (age 18 in Arizona). When the child attains age 18, the entire account must be distributed within ten years of that date.
• The beneficiary is disabled or chronically ill.
• The beneficiary is no more than ten years younger than the decedent.

Upon the death of the eligible designated beneficiary, the remaining account balance must be distributed within ten years of the eligible designated beneficiary’s death.

4. Expansion of 529 Plans

A 529 plan can be established to pay for a designated beneficiary’s qualified higher education expenses (tuition, fees, books, supplies, room and board). While contributions to a 529 plan are not deductible on the contributor’s federal income tax return, some states, including Arizona, allow deductions for state income tax purposes. Arizona allows a deduction for contributions to all 529 plans during the year of up to $4,000 for a married couple ($2,000 if single). The main benefit of a 529 plan is that any earnings on amounts held in the plan that are used to pay for qualified higher education expenses are not taxed when distributed. In the tax bill that was enacted in 2017, for distributions occurring after December 31, 2017, Congress expanded 529 plans to permit annual distributions of up to $10,000 to pay for the designated beneficiary’s tuition at an elementary or secondary public, private or religious school.

Expanded Use. Effective for distributions made after December 31, 2018 (these changes were made retroactive to the beginning of 2019), the SECURE Act has now expanded 529 plans to pay for expenses in certain apprenticeship programs and allows distributions of up to $10,000 to pay principal and interest on the designated beneficiary’s qualified student loans. The $10,000 limit on payments of student loans is an aggregate limit from all 529 plans over the life of the qualified beneficiary.

The new law also permits distributions of up to $10,000 to pay principal and interest on qualified student loans for the designated beneficiary’s siblings (including step-siblings). The deduction for interest paid on qualified student loans is disallowed to the extent distributions from a 529 plan were used to pay such interest.

Conclusion

As you can imagine, there are technical rules and other provisions contained within the SECURE Act that are beyond the scope of this article. At a minimum, the SECURE Act requires everyone to reexamine their beneficiary designations governing distributions from retirement plans and IRAs, particularly if a trust has been named as primary or contingent beneficiary. And, there are planning techniques whereby the equivalent of a stretch IRA may still be achieved even if the beneficiary is not an “eligible designated beneficiary.”

If you would like to review your beneficiary designations, please contact your Frazer Ryan or Whetstine Law Firm estate planning attorney at 602-277-2010.