To improve retirement security for many Americans, congress passed the Secure Act on December 20, 2019. The Secure Act changes some rules relating to the Traditional IRA and the Inherited IRA. Naturally, with any change in legislation, there are benefits and costs associated with the change.

Benefits for the Traditional IRA in the Secure Act

The benefits of the Secure Act favor owners of Traditional IRA’S. Here are the benefits of the Secure Act:

• There are no longer age limits for contributing to an Traditional IRA.
• The RMD (REQUIRED MINIMUM DISTRIBUTION) requirement pushed the age up to 72 from 70 ½.

These changes take effect on January 1, 2020. So, if you are a Traditional IRA owner currently receiving RMD’s, these changes won’t affect you.

The Cost to the Inherited IRA in the Secure Act

There is only one cost to the Secure Act, and it affects Inherited IRA’S.

The Secure Act removes the “stretch” IRA, which allowed beneficiaries to stretch distributions out over their single life expectancy. Instead, the Secure Act mandates that a non-spouse beneficiary of an Inherited IRA must completely distribute the IRA within 10 years following the death of the account owner. 

However, as with any new law, there are exceptions. The exceptions to the 10-year rule are:

• Assets left to a surviving spouse,
• a minor child,
• a disabled or chronically ill beneficiary,
• or beneficiaries who are less than 10 years younger than the original IRA owner.

This new law affects beneficiaries inheriting from original IRA owners that passed on or after January 1, 2020.

A Final Word on the Secure Act

The Secure Act provides favorable rules for Traditional IRA owners while they are still living. When these original Traditional IRA owners eventually pass, their surviving spouses will benefit. However, if the beneficiary is not a spouse or on the exception list, there is a cost to bear. The cost is higher taxes. Since non-spouse beneficiaries need to distribute the Inherited IRA in ten years rather than using their single life expectancy, the tax burden on distributions will be higher. Therefore, to relieve beneficiaries of a higher tax burden, Traditional IRA owners may need to consider new estate planning strategies related to Traditional IRA’s.

Note:

As soon as the IRS completes updating their publications concerning the Secure Act, I will provide updates to articles affected by the Secure Act.