In a year-end surprise from Congress, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (the Act) was passed as part of the Further Consolidated Appropriations Act, 2020, and signed into law by President Donald Trump on December 20, 2019. The Act affects how you may save for retirement and how many tax-deferred retirement accounts are ultimately taxed. The Act generally takes effect January 1, 2020 (although other effective dates may apply). Following are some key provisions of the Act that may affect your retirement planning.

Certain Age Limits Changed

People are living longer. Accordingly, the Act raises the age at which required minimum distributions (RMDs) from certain retirement plans and Individual Retirement Accounts (IRAs) must begin from age 70½ to age 72. As stated in a release by the House Ways and Means Committee,

Age 70½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy.

The age increase does not apply to anyone currently required to take RMDs. The increased age applies to distributions required to be made after, and with respect to, individuals who did not attain age 70½ by December 31, 2019. A few notes: an active employee who is less than a 5% owner may be able to defer RMDs under an employer plan until retirement; plan sponsors can still choose to require distributions at an earlier age (such as normal retirement age); and, no lifetime RMDs are required from a Roth IRA.

Having longer life expectancies means Americans may find themselves working longer as well. As the House Ways and Means Committee stated, “[a]s Americans live longer, an increasing number continue employment beyond traditional retirement age.” Beginning with tax years after 2019, the Act repeals the age limit that prevented an individual from making regular contributions to a traditional IRA after attaining age 70½ (as long as there is earned income to contribute) and for taking deductions for such contributions. An individual of any age may contribute to a Roth IRA (that rule has not changed), and income limits remain on eligibility to make Roth contributions but not traditional IRA contributions.

The removal of the contribution age limit for traditional IRAs is coordinated with the rules regarding qualified charitable distributions (QCDs) from an IRA. An individual’s QCDs up to $100,000 generally are excluded from gross income for the year if made after actually attaining age 70½ and made directly from the IRA to certain qualified charitable organizations (other than a private foundation or donor-advised fund).  However, the Act provides that the $100,000 annual limit on QCDs is reduced by the amount of a taxpayer’s deductible IRA contributions made after age 70½ (but not below $0) that have not already been used to offset an earlier QCD. This new rule also creates a short gap where a QCD can be made but does not count toward satisfying the taxpayer’s RMDs (which do not begin until age 72). 

Even though the Act changes the age at which lifetime RMDs must begin to 72 years, QCDs may still be made once the individual has attained age 70½.

Spouse: Surviving spouses retain the right to take RMDs over their single life expectancy, but the 10-year rule applies for successor beneficiaries upon surviving spouse’s death. Alternatively, a surviving spouse can elect to rollover the inherited amount to their own IRA.
Spouse: Surviving spouses retain the right to take RMDs over their single life expectancy, but the 10-year rule applies for successor beneficiaries upon surviving spouse’s death. Alternatively, a surviving spouse can elect to rollover the inherited amount to their own IRA.
Minor Child: The eligible designated beneficiary exception only applies for the minor children of the account owner (for example, not grandchildren or other minor children). Age of majority may be subject to further clarification, but presumably refers to the age of majority under applicable state law (generally age 18 or 21), subject to a further exception for children under age 26 who are still in school.
Disabled: A person who is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An acceptable form of proof of the existence of such disability will be required.
Chronically Ill: A person who has been certified by a licensed health care practitioner as being unable to perform (without substantial assistance from another) certain activities of daily living for a period that is indefinite or expected to be lengthy in nature, or having a level of disability similar to the foregoing as determined under applicable law and regulations.

 

Stretch Benefits after IRA Owner's Death Greatly Limited

The Act greatly reduces the ability of beneficiaries of an IRA to “stretch” out payments from an inherited IRA over their life expectancies. With a few exceptions for distributions made to “eligible designated beneficiaries” (described below), with respect to an IRA owner (for ease of reference, an owner) who dies after December 31, 2019, the Act requires the IRA balance to be fully distributed by December 31 of the tenth year after the owner’s death (the 10-year rule). It does not matter whether the owner dies before or after the required beginning date (RBD), and although interim distributions need not be made, the account must be fully distributed by December 31 of the tenth year after the owner’s death (for example, an owner’s death on May 5, 2020 requires full distribution of the inherited IRA by December 31, 2030). Of course, amounts distributed to the beneficiary from the IRA are subject to income tax, so shortening the time over which amounts are paid to the beneficiary may correspondingly accelerate any income tax due.

The ability to stretch payments out over a beneficiary’s life expectancy is still available for eligible designated beneficiaries. Eligible designated beneficiaries are: 

  • the surviving spouse of the owner; 
  • a child of the owner who has not reached majority (see box above for limits); 
  • a disabled individual; 
  • a chronically ill individual; and
  • any other individual who is not more than 10 years younger than the owner.

The determination of whether a designated beneficiary is an eligible designated beneficiary is made as of the owner’s death.

The account must be fully distributed under the 10-year rule following the death of the eligible designated beneficiary, or in the case of a minor child, following the earlier of the date the child attains the age of majority or death. A successor beneficiary can no longer step into the shoes of the original designated beneficiary to complete a life expectancy payout period regardless of the date of death of the original owner.

For example, the surviving spouse of the owner may use such spouse’s life expectancy for determining the payout period, but upon the spouse’s death the 10-year rule applies for any successor beneficiary.

The foregoing rules apply to designated beneficiaries (individuals and see-through trusts) and the new category of eligible designated beneficiaries. For beneficiaries who are not a designated beneficiary (the owner’s estate, a charity, or a trust that is not a see-through trust) the RMD rules remain unchanged. For an owner who dies before the RBD, the 5-year rule applies (the account must be fully distributed by December 31 of the fifth year after the owner’s death). For an owner who dies on or after the RBD, the owner’s remaining single life expectancy is used to determine the payout period.

The changes described above generally take effect for owner and beneficiary deaths after December 31, 2019. Later effective dates, exclusions, and/or other rules may apply to certain collectively bargained and government plans and certain annuities.

Trusts as Beneficiaries and Stretch Provisions:

Prior to the Act, certain types of trusts named as beneficiaries of retirement plans and IRAs (known as “see-through” trusts) allowed plan benefits received by the trust to be stretched out over the life expectancy of the oldest trust beneficiary. The rules for qualifying as a see-through trust were not changed by the Act; however, the Act potentially changes how certain trusts may work for RMD purposes.

There are two common types of see-through trusts: accumulation trusts and conduit trusts. Briefly, IRA distributions paid from a retirement plan or IRA to an accumulation trust named as beneficiary may be retained (accumulated) in the trust for potential later payment over time, whereas IRA distributions payable to a conduit trust must be distributed out to the trust beneficiary on a current basis (that is, the trust serves as a conduit for the IRA distribution).

Following the Act, the 10-year rule generally applies to these IRA payouts. For see-through accumulation trusts, this can mean that taxable payments to the trust may be accelerated over a shorter time period.

For see-through conduit trusts, the trust may be required to pay out all of the IRA or plan benefits to the trust beneficiary in the tenth year following the (post-2019) death of the owner, perhaps terminating the trust. If an owner dies with a conduit trust named as beneficiary, it may be possible to modify or reform the trust to an accumulation trust. State laws may vary and you should consult your tax and/or legal advisor.

The Act may allow for certain trusts, known as applicable multi-beneficiary trusts, to stretch the payment of plan or IRA benefits for the trust’s beneficiaries. Under this type of trust, only eligible designated beneficiaries who are disabled or chronically ill (as defined under the Internal Revenue Code) are permitted to be current beneficiaries of the trust. Following the death of the current beneficiary, the 10-year rule will apply to any amount left in the plan or IRA. 

Following the Act, trusts remain important estate planning tools for many reasons (e.g., potential creditor protection, spendthrift protection and the like). Please contact your tax and/or legal advisor as soon as possible to help determine whether you need to make any changes to the types of trusts and beneficiary designations used in your estate plan. 

Other Changes Made by the Act

The Act made a number of other important changes. A few changes that may be of interest to individuals are summarized below:

Penalty Free Withdrawals for the Birth or Adoption of a Child

Withdrawals from a retirement plan or IRA before the owner attains age 59½ are subject to a 10% penalty, unless an exception applies. Effective for distributions after 2019, the Act provides an exception for penalty-free withdrawals from applicable eligible retirement plans for a qualified birth or adoption distribution. The distribution must be made during the one-year period beginning on the date on which a child of the owner is born or on which the legal adoption by the owner of an eligible adoptee is finalized. An eligible adoptee is any individual (other than a child of the taxpayer’s spouse) who has not attained the age of 18 years or is physically or mentally incapable of self-support. An eligible retirement plan includes an IRA, certain defined contribution plans, and certain annuity contracts (but not defined benefit plans). Each individual may withdraw up to $5,000 without penalty with respect to any birth or adoption. Accordingly, a married couple essentially has available to them up to $10,000 ($5,000 each) from their eligible plans and IRAs. Subject to a number of restrictions and rules, distributions can be repaid to an eligible plan or IRA.

Use of 529 Plans Expanded

Qualified tuition plans (529 Plans) are a popular way to save for education expenses. A 529 Plan has a designated beneficiary who receives the plan benefits. Anyone can contribute to a 529 Plan and the plan assets, including the return on those assets, are income tax free if used for qualified higher education expenses.

The Act expands the definition of qualified higher education expenses to include fees, books, supplies, and equipment required for the designated beneficiary to participate in certain apprenticeship programs. The Act also expands the definition of qualified higher education expenses to include amounts paid as principal and/or interest on any qualified education loan (as defined in the Internal Revenue Code) of the designated beneficiary or siblings (including step-siblings) of the designated beneficiary. 

Allowing loans of a sibling to be paid from the beneficiary’s 529 Plan allows the sibling to receive this benefit from the plan without having to change the beneficiary of the entire plan.

The amount of loan repayments treated as a qualified higher education expense is capped at $10,000 for the life of each individual. Allowing loans of a sibling to be paid from the beneficiary’s 529 Plan allows the sibling to receive this benefit from the plan without having to change the beneficiary of the entire plan. Distributions to pay a sibling’s loans does not reduce the maximum amount available to pay the beneficiary’s loans (and the beneficiary need not receive this benefit before a sibling does). Each individual, whether a beneficiary or sibling, may receive, in the aggregate, up to $10,000 for loan repayments over such individual’s life from all 529 Plans. Thus, the $10,000 limitation cannot be circumvented by distributions from multiple plans.

A distribution in payment of a loan that exceeds the cap is treated as any other distribution that is not a qualified higher education expense, the portion of the withdrawal that is earnings on the 529 Plan principal is subject to income tax and a 10% penalty. State income tax law may tax distributions from a 529 Plan for student loan payments and apprenticeship costs; individuals should consult their tax advisor regarding the laws of their state. Nevertheless, even if a state’s tax laws do not conform to these recent changes in federal law, an individual may still be able to take advantage of the federal tax benefits. These changes are effective retroactive to the beginning of 2019.

Conclusion

The Act contains many more provisions and even the provisions discussed herein are more nuanced than space allows. To find out more about the Act and how it can affect your retirement planning, contact a PNC professional.

For more information, please contact your PNC advisor. If you are not a PNC client, please call 844-749-2854.

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SECURE Act Overview