This past December, Congress passed the SECURE Act of 2019. Short for Setting Every Community Up for Retirement Enhancement, this Act took effect on January 1, 2020. Among broader reforms, the Act increased access to workplace sponsored retirement plans and increased the minimum age at which retirees must begin taking required minimum distributions from IRA’s. These reforms are in an effort to help more Americans plan and save for retirement. In addition, the SECURE Act created new tax implications for heirs of retirement accounts such as IRA’s.

Some of the most talked about points of the bill are the provisions requiring distributions from inherited IRA’s. If an original IRA owner passes away after January 1, 2020, the heir, in most cases, will be required to withdraw all the assets from the IRA within 10 years. There are certain exemptions, but the new laws essentially get rid of ‘stretch’ IRA’s that were stretched from one generation to the next. In practice, the SECURE Act provisions will prevent families from passing down money tax-free in IRA’s.

In a few specific circumstances, the SECURE Act provisions requiring inherited IRA disbursements will not apply. Specifically, if an heir is a surviving spouse or minor child, the heir will not be required to withdraw the entirety of the assets. There are a few other exemptions, but these two are the most common. Fortunately for some, these laws are not retrospective and do not apply if the original IRA owner passed away before January 1, 2020. These heirs can continue with their assets as they were planning. If you find yourself inheriting an IRA, it is important to discuss your specific scenario with your tax preparer and a financial advisor. Distributions can be strategically planned to minimize their impact on your tax return.

Another important reform of the SECURE Act was an increase to the age where individuals must begin taking required minimum distributions (RMD’s) from their IRA’s. Previously, RMD’s began at age 70½ but now RMD’s will not start until age 72. This is particularly useful for individuals who have enough assets from other sources that they do not need to start using their IRA’s. These new laws are only applicable to individuals who turn 70½ after January 1, 2020. For example, if you turned 70½ in December 2019, you would need to continue taking RMD’s regardless of the new laws.

Further, the SECURE Act reduced the required amount of hours worked necessary to contribute to an employer retirement plan such as a 401K. Under the new laws, if an employee works more than 500 hours over a 3 year period, their employer cannot exclude them from participating in company retirement plans. It is important for businesses to understand the new laws to ensure that they are in compliance.

The SECURE Act will have implications for retirement for the coming decades. As always, we recommend discussing these new laws with your tax preparer and a financial advisor in order to find out how they impact you specifically and to position yourself as favorably as possible.