IRA Rules Have Changed Under the SECURE Act

There are important new rules to be aware of as it relates to individual retirement accounts (IRAs) that were included as part of the Setting Every Community Up for Retirement Enhancement Act (Secure Act), which was passed last year.

For starters, the law did away with the deadline for contributing to an individual retirement account. Previously, IRA account holders had to discontinue contributions when they turned 70½ , and were then subject to minimum distribution rules.

Under the new rules of the Secure Act you can make contributions as long as you are working, and minimum distributions do not commence until you turn 72. This change is an acknowledgement to the fact that people are living and working longer and taking more time to save.

IRAs and Inheritances

Prior to the Act, individuals that inherited an IRA account had to withdraw small amounts annually, over their lifetimes, to mitigate their individual tax impact and maximize the account balances in the IRA. Required mandatory annual withdrawals were based on life expectancy, and could be quite small and go on for decades (a technique known as “the stretch”).

Under the new rules, many people who inherit an IRS must completely liquidate it and pay any required taxes within 10 years.

These new rules apply to accounts inherited after December 31, 2019. Heirs of IRA owners who died in 2019 and earlier are still subject to the old rules.

However, the old rules aren’t entirely obsolete, even for newly inherited IRAs. A spouse may still inherit an IRA and continue to stretch withdrawals over time, and so can the account owner’s children — at least, until they turn 18 or 21. After which the above 10-year clock starts ticking.

People with disabilities and those with chronic illnesses who inherit an IRA also are exempt from the 10-year withdrawal deadline. And a beneficiary who is less than 10 years younger than the account’s owner — say, a brother or sister — can also continue to “stretch” the IRA.

The new rules apply to both traditional IRAs and Roth IRAs (in which contributions are made after tax and grow tax-free) as well as 401(k) workplace retirement accounts. The rules don’t take effect until 2022. So someone inheriting one of those accounts in the next two years can still follow the old rules.

Under the Secure Act the minimum distribution rules are no longer in effect. Instead of being obligated to withdraw some money each year, those who inherit an account can take withdrawals periodically or wait until the end of the 10-year period to drain the balance.

Work Arounds

One possible work around to mitigate the potential tax bite caused by the above changes is for individuals to convert their retirement accounts to a Roth IRA. Unlike traditional IRAs, money that is contributed to a Roth IRA is done with after-tax funds, so taxes generally aren’t owed on the subsequent withdrawals as long as certain rules are followed. The account owner would owe taxes at the time of the conversion, but withdrawals would then be tax-free to the heirs.

Another approach is for the account owner to divide the IRA funds among several beneficiaries, giving each less money, and minimizing certain tax concerns.