The Good Parts of the New Rules Regarding Distributions from IRA and Plan Interests

The SECURE ACT (Setting Every Community Up for Retirement Enhancement Act) was included as part of the massive December 2019 appropriations bill. The inclusion of the Act was a stealthy surprise, since most thought that it had been taken off the table earlier that year. For the most part, the new rules are effective for IRAs of owners who die after 2019. Although there are bad provisions, this Tax Tip discusses the four important good things about the Act. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) also affects IRA and plan distribution rules for 2020.

BAD PART MENTION: The most important bad part of the SECURE Act affects most persons who inherit IRAs. Formerly the heir was permitted to defer taxable distributions from the IRA over their lifetimes. Now, the inheritor generally must distribute the entire IRA by the end of the 5th year after the owner’s death (with no annual requirement to take any distributions before that date), unless the IRA qualifies for the 10 year rule. The Act has numerous important exceptions, and the rules are detailed. One is that if the owner dies after attaining her required beginning date (the “RBD”), then the inheritor must continue to take annual minimum required distributions (“RMDs”) using the owner’s remaining life expectancy, but applying the less generous “single life table.” The CARES Act pauses the 5 year clock to create a 6 year period if an owner died between 2015 and 2019. The 10 year payout is not extended.


The good parts of the SECURE Act and the CARES Act (the Covid-19 tax legislation:

1. The Required Beginning Date is now age 72. The Act helps by delaying the date when the IRA owner must begin withdrawing from his or her IRA (the required beginning date – the “RBD”) his or her minimum required distributions (“RMDs”). Instead of requiring distributions by April 1 of the year following the year when the owner turns 70 ½, the RBD is now April 1 following the year in which the owner is 72. BUT, if the owner was 70 ½ or older in 2019, the SECURE Act age 72 rule does not apply, but the CARES Act applies to permit the owner to waive that RMD, as well as the regular RMD otherwise due by the end of 2020. Like before, in 2021 and after, if the IRA owner delays the first year distribution until April 1 of the next calendar year, then two RMDs must be paid and taxed in that year.

1a. Skip RMD for 2020. For 2020, the CARES Act permits an owner to skip a RMD receipt.

2. IRA otherwise deductible contributions can now be made no matter what the age of the owner, but there is a catch. Formerly the owner could not make deductible contributions in the year or years in which or after he or she attained age 70 ½. Now they can be made if the owner has earned income, regardless of age, but be careful – See a. immediately below:

a. Limitation on QCD income exclusion. The Act did not change the date an IRA beneficiary can begin making a tax free Qualifying Contribution Distribution (“QCD”) from an IRA (not from a qualified plan interest) to a qualifying charity (limited $100,000 in a calendar year), which remains the date the owner attains age 70 ½. But Act Section 107(b) added language to Code Section 408(d)(8)(A), which reduces (dollar for dollar) the aggregate QCD income exclusion to the extent the taxpayer made deductible IRA contributions in years in or after he attained age 70 ½. This was done to prevent using the law change to create above the line charitable deductions.

3. In 2021 there are new and longer life tables to determine and reduce RMDs. This change is not part of the two Acts, but results from recent proposed regulations. The new tables are effective for distributions beginning in 2021. They are beneficial because they project longer life expectancies. This causes the RMDs to be lower, which permits delaying distributions and reducing current income tax. This permits more tax free buildup of value in IRAs, and is especially valuable for Roth IRAs, which are never income taxed.

Example: an owner who is 75 with a $1,000,000 IRA balance at the end of the prior calendar year would be required to distribute $40,650 under the new tables, when the owner would have had an RMD of $43,466 under the old tables. At an assumed 36% combined state and federal marginal income tax rate, the tax savings every year is about $1,000.

More good news: The new tables apply for those already receiving RMDs, whether or not otherwise recalculated annually. So in 2021, for a beneficiary already taking RMDs under a single life table (whether the based upon the life of the beneficiary or a prior holder of the IRA or plan interest) the life expectancy will reset to the new single life table. So it is possible for the life expectancy to be longer in 2021 that it was for 2020. The following is the example in the proposed regulations:

“For example, assume that an employee died at age 80 in 2018 and the employee’s designated beneficiary (who was not the employee’s spouse) was age 75 in the year of the employee’s death. For 2019, the distribution period that would have applied for the beneficiary was 12.7 years (the period applicable for a 76 year old under the Single Life Table in formerly applicable § 1.401(a)(9)–9), and for 2020, it would have been 11.7 years (the original distribution period, reduced by 1 year). For 2021, the applicable distribution period would be 12.0 years (the 14.0 year life expectancy for a 76 year old under the Single Life Table in paragraph (b) of this section, reduced by 2 years from 2019 (the year used to determine life expectancy)).”

Fewer of those inheriting IRAs will be eligible to use the tables because of the SECURE Act’s “bad” rule. That rule requires that distributions must be taken by the end of the 5th year after the owner’s death (or, at most, either (i) the end of the 10th year, or, (ii) if the owner had died after his required beginning date (now age 72), the owner’s remaining life expectancy).

4. The kiddie tax rate of the 2017 Tax Cuts and Jobs Act is repealed effective for 2019. The trust tax rates for unearned taxable income of minor children is repealed, and the parent’s tax rate apply for the year instead of trusts’ rates. The taxpayer can elect to re-determine the tax for 2018, and so amend that return.