The Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act, aims to improve retirement conditions and make it easier for business owners to set up a safe harbor plan for their future. So, how does the SECURE Act affect your IRA? Keep reading to find out.
What Is the SECURE Act?
Introduced in 2019, the SECURE Act is a provisional bill that increases access to tax-advantaged accounts to prevent older people from outliving their retirement funds. In addition to providing a safety net for adults over 65, the SECURE Act also does the following:
- Allows 401(k) plans to offer annuities
- Makes safe harbor plans for small business owners less expensive and easier to get
- Allows part-time workers to participate in a retirement plan from their employer
- Pushes back the age at which retirees are required to withdraw RMDs (required minimum distributions) from 70 to 72
- Allows IRA owners to continue contributing indefinitely
- Allows non-spouses inheriting IRAs to take distributions that empty the fund over a ten year period
This piece of legislation helps to bridge the gap between some of the most dramatic holes in the Social Security System. It gives many Americans the chance to have a retirement fund – an opportunity that they would not have otherwise been afforded.
The SECURE Act and IRA Exemptions
An IRA is an individual retirement account that allows the holder to save money. There are three main types of IRAs individuals can choose from:
- Traditional IRA: The individual can make contributions that are deductible on their tax return. Their earnings have the potential to grow under tax deferral until they retire. At that time, the money withdrawn from the IRA is taxed at a lower rate.
- Roth IRA: This type of IRA allows the individual to make contributions with money that is already taxed. These contributions may grow tax-free as long as the withdrawal happens under specific conditions.
- Rollover IRA: The individual may make contributions that are “rolled over” from another retirement plan like a 401(k) or 403(b).
The SECURE Act applies to traditional and Roth IRAs. Essentially, when an IRA holder leaves their retirement fund to a beneficiary, the funds have to be withdrawn in their entirety within ten years. This also affects 401(k) contributions. There will be no more stretch IRAs available for those who inherit the IRA after 2020.
While the new rule changes things for beneficiaries, not all of them are subject to the ten-year rule. Those who inherit an IRA before 2020 are not subject to the rule. There may also be more than one beneficiary of an IRA, in which case there must be an eligible designated beneficiary (EDB) who will handle the financial and legal inheritance of the retirement fund.
What Are Eligible Designated Beneficiaries?
An eligible designated beneficiary is a person who fits into one of five categories under the SECURE Act. The EDB must be:
- The owner’s spouse
- The owner’s minor child
- A disabled person
- An individual with chronic illness
- Any person who is no more than ten years younger than the deceased IRA owner
If the beneficiary falls into one or more of the above categories, they may be an eligible designated beneficiary.
However, there are exceptions to this rule. For example, if a minor child ages out of EDB status, they can no longer hold on to the IRA and must follow the ten-year rule for withdrawal.
Additional exceptions are as follows:
- A surviving spouse may roll over an inherited IRA into their own separate IRA and take regular withdrawals in line with their required minimum distributions (RMDs).
- In some cases, a minor child may be able to get an extension until age 26 before they are subject to the ten-year rule.
- Disabled individuals and those with a chronic illness may calculate the required minimum distribution of an inherited IRA using their own life expectancy instead of the ten-year rule.
- The ten-year younger rule may apply to friends and siblings of those listed as beneficiaries of an IRA. If they do not have a disability or chronic illness, they may also use their own life expectancy to calculate the RMD.
These exceptions are complex, and you should always proceed with the help of an attorney. If there are complications with the EDB selection process, contact a legal representative as soon as possible to protect the IRA and your financial interests.
Why Is the SECURE Act Necessary?
The Social Security system, established initially under President FDR, has become a crumbling institution that is nearly useless to those it’s intended to help. Over the decades, as inflation rose, the economy fell, and wages stayed the same, retirement started to move further and further outside the realm of possibility.
Suddenly, millennials cannot benefit from the program, and gen-z may be unable to retire altogether. The SECURE Act takes some of the pressure off of the Social Security system and bolsters many retirees. So, how does it change things for those with IRAs?
What You Can Do To Prepare
If you have an IRA or are a beneficiary to an IRA, you should contact an attorney. A lawyer can work through the IRA plan and help you navigate the changes from the SECURE Act. You should be able to protect what matters, and at Aria Law PLLC, we believe in providing sound legal guidance to our clients so they can achieve their goals.
Contact our firm today and find out more.