IRA SECURE Act Rules You Need to Know

Two pieces of legislation have reshaped retirement savings in the United States: the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022. These acts were designed to improve financial security and expand access to retirement savings for Americans. They introduced a wide array of adjustments to the rules governing retirement accounts, including Individual Retirement Arrangements (IRAs) and employer-sponsored plans. The laws modernized retirement regulations, resulting in a new set of guidelines for savers and retirees.

Revised Age for Required Minimum Distributions

Recent legislation changed the age at which owners of traditional retirement accounts must begin taking Required Minimum Distributions (RMDs). An RMD is a mandatory annual withdrawal the IRS requires from most retirement accounts once the owner reaches a certain age. Failure to take an RMD results in a tax penalty of 25% of the amount not withdrawn, which can be lowered to 10% if the error is corrected in a timely manner.

The 2019 SECURE Act increased the RMD age from 70½ to 72. The SECURE 2.0 Act further adjusted this age, increasing it to 73 as of January 1, 2023. Individuals born between 1951 and 1959 will begin their RMDs at age 73.

Beginning on January 1, 2033, the RMD age will increase again to 75 for individuals born in 1960 or later. These increases allow funds more time to grow on a tax-deferred basis.

New Flexibility for IRA Contributions

The SECURE Act of 2019 eliminated the age restriction on contributions to traditional IRAs. Previously, contributions were prohibited for individuals age 70½ and older. This age limit has been repealed, allowing an individual of any age with earned income to contribute to a traditional IRA. This change aligns the rules for traditional IRAs with those for Roth IRAs, which have never had an age restriction.

The requirement to have earned income to make a contribution remains. To contribute, an individual must have compensation, such as income from wages or self-employment, not income from sources like Social Security or pension payments.

The 10-Year Rule for Inherited IRAs

The SECURE Act replaced the “stretch IRA” for most non-spouse beneficiaries with a 10-year rule. This applies to individuals who inherit an IRA from someone who passed away in 2020 or later. The rule mandates that the entire balance of the inherited IRA must be distributed by December 31st of the 10th year following the original owner’s death. For example, if the owner died in 2025, the beneficiary must empty the account by December 31, 2035. This applies to both traditional and Roth IRAs.

The timing of the original owner’s death relative to their own RMD schedule affects the distribution requirements. If the original account owner passed away before their required beginning date (RBD) for taking RMDs, the beneficiary is not required to take annual distributions. They only need to ensure the account is empty by the 10-year deadline.

However, if the original owner died on or after their RBD, the beneficiary must take annual RMDs for years one through nine, based on their own life expectancy. The remaining balance must then be fully withdrawn in the tenth year.

Due to confusion surrounding this rule, the IRS waived penalties for missed annual RMDs from inherited accounts for 2021 through 2024. For those affected, this means the requirement to take these yearly distributions begins in 2025.

Key Exceptions to the 10-Year Rule

The SECURE Act created a category of beneficiaries who are exempt from the 10-year rule. These “Eligible Designated Beneficiaries” (EDBs) can take distributions from an inherited IRA over their own life expectancy. This method allows for extended tax-deferred growth and smaller annual withdrawals. There are five types of EDBs.

Surviving Spouses

A surviving spouse can treat an inherited IRA as their own by rolling the assets into their personal IRA, which delays RMDs until they reach the required age. Alternatively, they can remain a beneficiary of the account. This allows them to either delay distributions until the deceased spouse would have reached RMD age or begin taking distributions based on their own life expectancy.

Minor Children of the Account Owner

A minor child of the account owner can take life expectancy payments from the inherited IRA until they reach age 21. Once the child turns 21, they are no longer an EDB. The 10-year rule is then triggered, and the remaining balance must be distributed within the next 10 years.

Disabled Individuals

An individual who is considered disabled under the strict IRS definition can stretch distributions over their life expectancy. To qualify, the beneficiary must be unable to engage in substantial gainful activity due to a medically determinable physical or mental impairment that is long-term or expected to result in death.

Chronically Ill Individuals

Individuals who are chronically ill can also take distributions over their life expectancy. This status requires being unable to perform at least two activities of daily living for a prolonged period, according to the IRS definition. For both disabled and chronically ill status, the beneficiary must provide documentation to the plan administrator.

Beneficiaries Not More Than 10 Years Younger Than the Decedent

Any beneficiary who is not more than 10 years younger than the deceased account owner is also an EDB. This often applies to siblings or unmarried partners. These beneficiaries can use their own life expectancy to calculate RMDs from the inherited account.

New Penalty-Free Withdrawals

The SECURE Act allows for penalty-free withdrawals for expenses related to childbirth or adoption, known as a “Qualified Birth or Adoption Distribution” (QBOAD). An account owner can take a distribution of up to $5,000 from an IRA or 401(k) without the 10% early withdrawal penalty for those under age 59½. The $5,000 limit is per individual, per event, meaning each parent can withdraw up to $5,000 for each new child. The distribution must be taken within one year following the birth or finalization of the adoption.

While the 10% penalty is waived, the distribution is still taxable income and will be included in the individual’s gross income for the year. The individual has the option to repay the distribution to a retirement plan within a three-year period, and this repayment is not subject to annual contribution limits.