2020 Tax Law Changes That Might Affect Your Retirement Account

By Joseph A. Bollhofer, Esq.

            A new Federal tax law affecting how retirement accounts are treated became effective January 1, 2020.  It is called the “Setting Every Community Up for Retirement Enhancement (SECURE) Act”.

            Putting aside the issue of the suitability of the law’s name, it focuses on three main areas: 

              1)  It increased the age at which Required Minimum Distributions (RMDs) must

                   begin from 70½ to 72.

              2)  It removed the “stretch” provisions for many beneficiaries of IRAs.

              3)  It expanded access to IRAs without penalty in limited circumstances.

            The government giveth with one hand and taketh with the other.

New RMD Age of 72

            This change provides an obvious benefit.  Since required distributions do not have to start until age 72, the new law allows additional time for retirement accounts to grow without required distributions and the resulting income taxes.  Those who reached age 70½ before the end of 2019 are not eligible for this benefit under the new law.

            For those under 70½, the additional time before RMDs are required to begin also will allow them to convert part of their IRA to a Roth IRA.  This converts taxable money into an account where withdrawals are income tax free if certain requirements are met.  Roth IRAs have no RMD requirements.

Removal of the “Stretch” Provisions

            A major detriment for many beneficiaries is the elimination of the rule that allowed an IRA beneficiary to stretch out the RMDs over his or her own life expectancy, with the result that there would be an expected reduction in income taxes.  Under the Secure Act, most IRA beneficiaries will now have to distribute their entire inherited IRA account within 10 years after the death of the original owner of the account.

            However, there are certain exceptions to the 10 year rule.  The following individuals are still permitted to receive distributions from an inherited IRA over their lifetimes:

            A)  Surviving Spouse

            B)  Minor children. However, once the child reaches majority, the IRA must be distributed over a 10 year period thereafter.  If the minor had not completed a “specific (undefined) course of education” the age of minority may continue up to age 26.

            C)  A beneficiary who is not more than 10 years younger than the original IRA holder.

            D)  A disabled beneficiary (as specifically defined in the statute)

            E)  A chronically ill beneficiary (as specifically defined in the statute) 

            The beneficiaries identified above are known as “Eligible Designated Beneficiaries”.  All other persons must have the IRA money distributed over a period of no longer than 10 years after the death of the original owner.  This likely will result in those beneficiaries being in higher tax brackets, and a shorter period of time for the account to grow tax deferred.

            This part of the law is being called the “death of the stretch” on inherited IRAs.  The law reportedly will result in an additional 15.7 billion dollars in projected revenues. 

Expanded Access to IRAs Without Penalty

            The law also allows penalty-free withdrawals of up to $5,000 in the year of a birth or adoption of a child and allows distributions from 529 education savings accounts to help pay for student loans and other qualified expenses to a limit of $10,000.

Impact on Trusts

            Anyone with a trust named as beneficiary of an IRA should determine whether it should be changed. Many trusts will no longer work as planned under the new rules and could result in either large taxable distributions if IRA funds are paid to trust beneficiaries or high trust tax rates if the funds remain in the trust.

            The above summary only highlights the more important provisions of the new law.  It will have a major impact upon most IRA beneficiaries.  It is important to consult with a qualified advisor to help guide you through the new rules so that you are best positioned to minimize potential adverse impacts and take advantage of new benefits. 

Copyright 2020 Joseph A. Bollhofer, Esq.

 Joseph A. Bollhofer, Esq., is an attorney who practices law in the areas of elder law, Medicaid, estate and business planning and administration, and real estate. He is a member of the National Academy of Elder Law Attorneys, and of the Elder Law, Real Property, and Surrogate’s Court Committees of the Suffolk County Bar Association and of the Elder Law and Real Property Law Sections of the New York State Bar Association. He has been serving area residents since 1985 and is admitted to practice law in New York and New Jersey. His office is located at 291 Lake Ave., St. James, NY. (584-0100). For reprints of this article and others concerning Medicaid, Elder Law and Estate Planning, send a request to info@bollhoferlaw.com or visit www.bollhoferlaw.com.