New IRA, RMD and Estate Plan Rules

Del YounglasCOVID-19, Featured News

Featured News

The rules have changed regarding your IRAs, RMDs and estate plan

By: Dave Reyes, Shareholder

Many individuals estates typically include IRAs. Be aware that two major laws were enacted into law recently, the Setting Every Community Up for Retirement Enhancement (SECURE) Act  passed on December 20, 2019, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed on March 27, 2020, have had a direct effect on IRAs.

In a nutshell, the CARES Act waives required minimum distribution (RMD) rules for IRAs (and certain defined contribution plans) for calendar year 2020. If you are in a position where you do not need to take withdrawals, 2020 is an opportunity to pass on receiving a distribution from your retirement plan or IRA. However, bear in mind that because the SECURE Act generally put an end to “stretch” IRAs, the estate planning benefits of inheriting IRAs are somewhat muted.

RMD Rules Waived for 2020

Not taking RMDs in 2020 is particularly advantageous because the amount of the distribution is based on year-end 2019 account values. Otherwise, individuals might be forced to liquidate account assets at depressed values during the stock market downturn.

The waiver covers RMDs required for 2020 and applies to distributions from defined contribution plans and IRAs.  If an individual has already taken his 2020 RMD, there is a possibility he may be able to put the money back into his plan or IRA.  There are two scenarios’ where this can apply.

  • If the distribution has occurred within the last 60 days, the amount distributed can generally be rolled back into the plan or IRA, or
  • If the RMD were received between February 1, 2020 and May 15, 2020, a rollover can be redeposited up until July 15, 2020.

Note, there are rules which limit rollovers between IRA’s to one rollover within a 12-month period. So, it’s important to consult your tax advisor if you are considering either of these options.

SECURE Act Changes the RMD Age

Keep in mind that for distributions required to be made after December 31, 2019, the age RMDs are required to begin has changed from age 70 ½ to age 72.

“Stretch” IRAs Eliminated

One of the most significant changes under the SECURE Act will impact some estate plans, the SECURE Act eliminates the so-called “stretch” RMD provisions that have allowed the beneficiaries of inherited IRAs and defined contribution plans to spread the distributions over their life expectancies. Younger beneficiaries could use this provision to take smaller distributions and defer taxes while their accounts continued to grow. In some cases, a young beneficiary could stretch distributions out over 30 or 40 years.

Under the SECURE Act, most beneficiaries must withdraw the entire balance of an account within 10 years of the owner’s death. An exception to the 10-year rule applies to a beneficiary who is a surviving spouse, a minor child, a disabled person or someone who is chronically ill. Distributions made under the 10-year rule do not have to follow any set schedule. All that is required is the account must be liquidated within the 10-year period. Thus, an individual could wait and withdraw the entire amount at the end of 10 years if he wishes.

The new rules apply only to those inheriting a retirement account or IRA from an individual who died after 2019. Thus, retirement benefits inherited prior to 2019 are grandfathered, and will not be subject to the new rules as they will continue to follow the prior rules.

Review Your Plans

The changes made by the CARES Act and the SECURE Act may have an impact on your retirement and estate plans. We can help you review your situation to ensure you understand how the changes under both these tax acts will impact your retirement.  If you have questions, please contact your Maloney + Novotny advisor or email Dave Reyes at or call him at 216-344-5233.

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