How the CARES and SECURE Acts Changed Required Minimum Distributions – Part 1

June 8, 2020
By George Dulgeryan and Carí Jackson Lewis, CCF Senior Development Officers
and William Strickland, CCF Planned Giving Officer

The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was passed into law on December 20, 2019 as part of the Further Consolidated Appropriations Act, 2020, P.L. 116-94, and it became effective on January 1, 2020. In response to the outbreak of the novel coronavirus disease, COVID-19, on March 27, 2020 Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Taken together, these laws made sweeping changes to the rules regulating traditional Individual Retirement Arrangements (colloquially called Individual Retirement Accounts, or “IRAs”). IRA holders (also here called “retirement savers”) who make charitable contributions from their IRAs to public charities like the California Community Foundation (“CCF”) are most impacted by these changes.

In this two-part series, we will discuss how the changes incorporated into the two Acts impact donors with IRAs. Part One of this series focuses on the changes to the required minimum distribution requirements, and Part Two will examine the complex adjustments to the rules surrounding qualified charitable distributions.

Change of RMD start date from age 70 ½ to 72
IRA accounts are retirement savings accounts, contributions to which are made on a tax-free basis (either through pre-tax salary deductions via an employer-sponsored account, or upon taking the tax deduction on a personal return). Distributions from IRA accounts are taxed as ordinary income. Prior to the passage of the SECURE Act, an IRA holder or an IRA beneficiary who had reached the age of 70 ½ was generally required to withdraw funds from their IRA annually, and pay income taxes on the amounts withdrawn, until the funds were extinguished. These mandatory annual withdrawals, called Required Minimum Distributions (“RMDs”), are the minimum amounts that IRA holders must take each year. The RMD requirement applies to traditional IRAs, employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans, and other IRA-based plans. This article will focus on the changes to the rules for traditional IRAs.

The SECURE Act raised the start date for RMDs to age 72. Today, the rules now state that if a retirement saver reached the age of 70½ in 2019, the pre-SECURE Act rule applies, and they should have taken their first RMD by April 1, 2020. If, however, the IRA holder reaches age 70 ½ in 2020 or later, they must take their first RMD by the later of April 1 of the calendar year after the IRA holder reaches age 72 or the calendar year in which the IRA holder retires.

Repeal of 70 ½ age cap for traditional IRA contributions
The SECURE Act also repeals the age cap for making contributions to a traditional IRA. The pre-SECURE Act rules barred retirement savers with earned income (e.g., wages, salaries, commissions, professional fees, bonuses and self-employment income) from making contributions to a traditional IRA after age 70 ½. Now, IRA holders who work past age 70 ½ – even on a part-time basis – may continue making tax deductible contributions to their tax-deferred accounts until they discontinue receiving earned income, allowing them to continue adding to their retirement nest eggs.

Waiver of RMD requirement for 2020
In acknowledgement of the market turbulence caused by the COVID-19 outbreak, the CARES Act provided IRA holders who would have had to take an RMD in 2020 with the option of skipping their 2020 withdrawal. The waiver of the RMD requirement for 2020 is meant to give retirement savers the ability to leave the funds in their IRAs to grow and potentially recover some of the losses incurred in the recent market downturn. However, while IRA holders will not have to make an RMD for 2020, they retain the ability to make a qualified charitable distribution to the California Community Foundation and other charities and to exclude the amount of that contribution from their taxable income in 2020, subject to certain conditions. We will discuss qualified charitable distributions (“QCDs”), and the revisions to the QCD rules, in Part Two of this continuing series.

The theories behind the raise in the RMD start date age and the repeal of the 70 ½ age cap for contributions to traditional IRAs coincides with the purpose behind the Internal Revenue Service’s new proposed RMD life expectancy tables (proposed in November 2019 to take effect in 2021, but not yet adopted). Recognizing Americans’ increased life expectancy, the strategies are designed to reduce both the number of required mandatory withdrawals, and the total amount of sums required to be withdrawn, thereby conserving the assets in the accounts to extend farther into retirement savers’ lifetimes.

Part Two of our series about changes to individual retirement accounts that impact donors, entitled “How the Anti-Abuse Rule of the CARES Act Changed Qualified Charitable Distributions” will address the complexities introduced by the anti-abuse provisions into the qualified charitable distribution mechanism.

This article is not intended to be inclusive of all the rules and regulations that govern IRAs, and it should not be considered legal or financial advice. Please consult your legal and financial professionals for more information about your particular circumstances.

If you have any questions about charitable giving with Individual Retirement Accounts, and the application of the provisions within the SECURE and CARES Acts discussed above, please contact us to discuss how we may be of assistance.

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