Why make it simple when difficult will do. That seems to be the motto of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, even in its title. The SECURE Act has been the law of the land since January 1, 2020, and the 125 pages of reforms were, allegedly, supposed to make saving for retirement easier and more accessible for many Americans.
The SECURE Act makes changes to defined contribution plans such as 401(k)s, defined pension plans, IRAs, and 529 college savings accounts. Some of the changes are an improvement while others seem like nothing more than forcing people to pay taxes more quickly, specifically inherited IRAs.
Among the positives:
- Required Minimum Distributions (RMD) now begin at age 72, not 70 ½ as before. Currently, there is a bill before Congress that would raise the RMD age to 75.
- There is no longer an age cap for making traditional IRA contributions. If you’re still working, you can contribute.
- Long-term, part-time workers can participate in 401(k) plans. Except in the case of collectively bargained plans, employers maintaining a 401(k) plan must offer participation to anyone who works more than 1,000 hours in one year or 500 hours over 3 consecutive years.
- Parents are allowed to withdraw up to $5,000 from retirement accounts, penalty-free, within the first twelve months after the birth of a child, or for qualified adoption expenses.
- Parents can withdraw up to $10,000 from 529 plans to repay student loans.
And then, there’s the inherited IRA. Before the SECURE Act, the rules were simple—when you inherited the IRA from a non-spouse you had to take a Required Minimum Distribution (RMD) every year based on your age and you could stretch it out over your lifetime. You paid taxes on what you withdrew each year.
Now, however, there are three beneficiary designations for inherited IRAs.
- Non-Designated Beneficiary. This is a non-person, such as the deceased’s estate or any trust that doesn’t qualify as a see-through trust according to IRS minimum trust regulations. If the retirement plan owner dies before the age he would be required to take distributions, the inherited beneficiary must withdraw all funds from the account by the end of the year that contains the fifth anniversary of the date-of-death of the decedent (The 5-year rule).
- Designated Beneficiary. This is any beneficiary who is a non-spouse to the deceased. These beneficiaries are required to have all funds withdrawn by the end of the year that contains the tenth anniversary of the date-of-death (The 10-year rule).
- Eligible Designated Beneficiary. There are five eligible designated beneficiaries; the deceased’s spouse, a minor child of the deceased, a disabled person, a chronically ill individual, and any person who is not more than 10 years younger than the deceased. All five categories of eligible designated beneficiaries can choose a payout based on their life expectancy, but also have the option of using the 10-year rule if the decedent died before the date he would have been required to begin taking distributions.
There are other intricacies involving inherited IRAs and all of them are listed in IRS Publication 590-B. Suffice it to say, there are enough twists and turns in the SECURE Act that you may want to get professional advice if you find yourself on the receiving side of an inherited IRA.