February 4, 2020
Dear Clients and Friends:
As you may be aware, the federal Setting Every Community Up for Retirement Enhancement Act of 2019, the SECURE Act, was signed into law on December 20, 2019. Most of the Act’s provisions have a relevant effective date of January 1, 2020. We are writing to inform you of the significant provisions that could have an impact on your retirement and estate plans. In particular, the SECURE Act includes several provisions affecting Individual Retirement Accounts (“IRAs”); these provisions are summarized immediately below.
Increase in Age for Required Minimum Distributions to 72. The Act increases the trigger age for required minimum distributions from IRAs from age 70½ to age 72, for individuals who turn 70½ after December 31, 2019. Accordingly, if this applies to you, you do not have to take your first IRA required minimum distribution until April 1 of the year in which you turn 73 (although you may want to take it in the year you turn 72 to avoid having to “double up” the following year).
Maximum Age for IRA Contributions. The SECURE Act repeals the maximum age (70½ years) limitation for contributions to a traditional IRA for contributions made for taxable years beginning after December 31, 2019.
IRA Post-Death Required Minimum Distribution Rules. The Act limits the use of “Stretch IRAs” by requiring an individual's entire interest in an IRA to be distributed to a designated beneficiary within 10 years after the death of the employee, whether or not distributions of the employee's interest have begun. An exception is provided for “eligible designated beneficiaries” that generally allows distributions over the life or life expectancy of the eligible beneficiary beginning in the year following the year of the employee's death. Eligible designated beneficiaries include (1) surviving spouses, (2) children who have not reached the age of majority, and (3) disabled and chronically ill beneficiaries. Surviving spouses can still elect to delay distributions until the end of the year that the employee would have attained age 70½ (or now age 72). The provision generally applies to distributions with respect to individuals who die after December 31, 2019. The SECURE Act’s requirement to distribute the individual’s entire interest in the IRA within 10 years after the individual’s death can result in the unintended acceleration of income to the beneficiaries and, in some instances, could prove disastrous for an estate plan premised on a prolonged (much greater than 10-year payout) period of distributions, particularly when a trust is the named beneficiary of the IRA.
“Kiddie Tax” Repeal. The SECURE Act effectively repeals the provision of the Tax Cuts and Jobs Act which subjected unearned income of certain children to the tax brackets and rates imposed on trusts and estates. The Act also includes a provision permitting the taxpayer to elect a retroactive application of the repeal to tax years 2018 and 2019 consistent with IRS guidance.
IRA Contribution Options for Some Students. The SECURE Act expressly treats taxable amounts paid to graduate and postdoctoral students as income for purposes of IRA contributions, allowing these students to use non-tuition fellowship and stipend payments to contribute to an IRA.
Child Birth or Adoption Withdrawals. The SECURE Act provides an exception to the 10% early withdrawal tax on distributions for qualified birth or adoption expenses up to $5,000 from IRAs made after December 31, 2019 to an individual during the 1-year period beginning on the date on which the individual's child is born or on which the legal adoption of an eligible adoptee is finalized.
Small Employer Pension Plan Credits. The Act increases the credit for small employer pension plan start-up costs (capped at $5,000 per year) and establishes a new, albeit small ($500 per year), automatic-enrollment credit for start-up or conversion costs of employers that include an automatic contribution arrangement in a qualified employer plan.
If any of these provisions of the SECURE Act are of interest to you or impact the retirement or estate planning you have already completed, please do not hesitate to contact us. Indeed, if you have established a trust to receive distributions from an IRA, we strongly encourage you to review whether the trust still assists in fulfilling your dispositive intentions.
We welcome the opportunity to meet with you to discuss your estate plan or retirement plan in light of the SECURE Act.
Very truly yours,
Robert Freedenberg, Esquire
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