Just before the holiday recess, the House and Senate passed the Further Consolidated Appropriations Act which the President signed into law on December 20, 2019. The new Act prevented a government shutdown and laid out the appropriation of funds across government departments and programs. As is fairly typical with a year-end appropriation bill, there were several tax provisions that were added, the SECURE Act being among them. In case you were wondering, “SECURE” stands for “Setting Every Community Up for Retirement Enhancement.” The SECURE act impacts individuals and businesses. In this article, we will focus on some of the key tax changes that impact individuals. In a later article, we will focus on how businesses are impacted.


Three Major Changes to IRAs Include:

  1. Moving the start date for required minimum distributions (RMDs) to the year in which the owner turns age 72;

  2. Ending the age 70.5 limit for contributions to an IRA; and

  3. Shortening the distribution period for non-spouse inherited IRAs to a 10-year maximum (eliminating “stretch” IRA rules).

Regarding RMDs, the age at which an individual must start taking distributions has been moved back from age 70.5 to age 72. However, it is very important to understand who is impacted by this rule change. If you reached age 70.5 in 2019, then the old rules still apply. You must take a distribution by April 1, 2020, or sooner. If you reach age 70.5 in the year 2020 or later, then the new rules apply and you must take your first distribution by April 1 of the year following the year you reach age 72. 


With respect to the IRA contribution age limit, this is fairly straightforward. In the past, you couldn’t contribute to your IRA after reaching age 70.5. Under the new rules, the age limit has been removed. However, your contribution is still limited to earned income. So you would have to still be working, earning wages or self-employment income, to continue to make contributions.


One of the most significant changes is the elimination of the Stretch IRA. These rules pertain to the beneficiary of an inherited IRA. Under the old rules, so long as the beneficiary was a designated beneficiary (generally a person or qualified trust) the beneficiary was required to take minimum distributions over his or her life expectancy. From a tax planning standpoint, this allowed the beneficiary to defer taxes over his or her life.


Under the new rules, which apply to IRA owners who pass away after 2019, non-spouse beneficiaries of IRAs (including Roth IRAs) are subject to a new 10-year rule. This rule requires that the non-spouse beneficiary distribute 100% of their inherited IRA by December 31, 10 years after the owners’ death. Beneficiaries may take distributions before then, but are not required to. From a tax planning standpoint, this reduces the opportunity for tax deferral. It’s also important to note that distributions from a traditional, inherited IRA (not a Roth inherited IRA) are subject to ordinary income tax rates and can drive the beneficiary into higher tax brackets. From a family wealth planning standpoint, this can be very impactful. Exceptions to the new 10-year rule are referred to as “eligible designated beneficiaries”.


Exceptions Include:

  1. Surviving spouse

  2. Minor child (applies until the minor child reaches the age of majority)

  3. A disabled or chronically ill individual

  4. An individual who is not more than 10 years younger than the deceased IRA owner

The following charts illustrate the old rules that apply if the IRA owner passes away prior to the year 2020 and the new rules that apply in the year 2020 and after. Additionally, when determining which set of rules apply, it is also important to determine if the IRA owner passed away before their required beginning date (RBD) or after. The RBD is the date by which the first distribution is required. Under the old rules, that is April 1, following the year the owner turns 70 ½. Under the new rules, that is April 1, following the year the owner turns 72. 


8d5dd10239269ef2bb0584c0f8c7b837CCH Tax Law Editors. CCH Tax Briefing – The SECURE Act – In Focus, 2020. vol. 1, Wolters Kluwer, 2019, Wolters Kluwer,


Key Tax Planning Takeaways

The new rules create opportunities for thoughtful tax planning. As we have written about before and will write about more extensively, managing wealth through tax planning often means: 1) maximizing after-tax returns, 2) reducing unnecessary taxes, and 3) smoothing out unavoidable taxes or “income tax smoothing”. The new rules have a big impact on income tax smoothing.


In some cases, it might make sense to defer income taxes for as long as possible. In which case, deferring your RMD to age 72 likely achieves that goal. However, in some cases, the years between work and when RMDs begin to represent low tax years. While you are working, your tax rate might be higher and then when RMDs begin you might be pushed into higher tax rates. But between those periods of time, your tax rate might be lower. In this case, there is an opportunity for income tax smoothing. It might make sense to accelerate income in the lower tax years. This could be achieved by taking distributions from your IRA, or alternatively, could be achieved through a series of Roth conversions. By delaying the RMD age until 72, the opportunity for income tax smoothing has been extended.


Additionally, income tax smoothing should be considered for the next generation… or whomever you designate as your beneficiary. Inherited Roth IRAs are subject to the new 10-year rule. However, the distributions to the beneficiary are not subject to tax. Therefore, there is considerable impact when evaluating income tax smoothing for multiple generations.


Changes to 529 Plans

One last change that we wanted to mention in this blog relates to 529 Plans. The definition of Qualified Higher Education Expenses (QHEE) has been expanded. This is important because distributions for QHEE are excluded from gross income. QHEE now includes principal and interest payments on any qualified student loan of the beneficiary or sibling of the beneficiary up to $10,000. It is important to note that the $10,000 limit is a lifetime limit, not an annual limit.


As you can see, there have been some meaningful changes to the tax law as a result of the SECURE Act. In this blog, we didn’t cover all the changes but rather focused on some of the key changes that impact individuals and some of the planning considerations we are mindful of. If you have any questions, please reach out to our team. We strive to be a trusted resource.



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