Signed into law by President Trump on December 20, 2019, the Setting Every Community Up for Retirement (SECURE) Act brings a number of changes for the new year. The passage of the SECURE Act in late December has immediate impact through two very significant changes. As of January 1, 2020, the required minimum distribution (RMD) age for retirement accounts and one big rule regarding inherited IRAs and TSPs have changed.
NEW RMD AGE
RMDs are amounts that must be withdrawn from traditional and Roth TSP accounts and traditional IRAs once a certain age is reached, and for TSP accounts, once you are separated from federal service. In the past, when you reached age 70 ½ and were separated from service, you were required to begin taking RMDs from your TSP accounts. For anyone separated from service and age 70 ½ before January 1, 2020, the old RMD rules still apply.
Anyone who turns 70 ½ and will be separated from federal service on or after January 1, 2020, has a new RMD age: 72. The new RMD age also means that you can now contribute to your TSP or traditional IRA until age 72. See the chart below to determine your RMD age for TSP accounts.
| Traditional or Roth TSP | |
|---|---|
| Separated from Service and age 70 ½ before January 1, 2020 | RMD at 70 ½ |
| Separated from Service and age 70 ½ on or after January 1, 2020 | RMD at 72 |
It’s important to remember that TSP and IRA rules are not exactly the same. For TSP, you do not have to take RMDs if you are still working for the federal government; however, this is not the case for IRAs. When it comes to traditional IRAs, RMDs must be taken whether you are still working or not. Keep in mind that RMDs still do not apply to Roth IRAs. See the chart below to determine your RMD age for IRAs.
| Traditional IRA | |
|---|---|
| 70 ½ before January 1, 2020 | RMD at 70 ½ |
| 70 ½ on or after January 1, 2020 | RMD at 72 |
KEY CHANGE TO INHERITED IRAs AND TSPs
The SECURE Act also contains a significant shift regarding inherited IRAs and TSPs. In the past, inherited retirement accounts could be stretched out over the lifetime of the recipient. This strategy, known as the “stretch IRA”, is now limited to certain requirements. With a few exceptions, IRAs inherited on or after January 1, 2020, must now be withdrawn from the account within 10 years of the account owner’s death.
For inherited TSPs, this rule will not yet be implemented. Inherited TSPs will not be subject to the new ten-year distribution for employees who die before Jan 1, 2022. In essence, federal employees have almost two more years until the “stretch” rule is eliminated.
Stretching the IRA is still an option if you inherit the IRA under one of the four exceptions below:
- Surviving spouse
- Disabled or chronically ill individuals
- Individuals who are not more than 10 years younger than the IRA owner
- Child of the IRA owner who is a minor
The changes implemented with the passage of the SECURE Act have significant tax and wealth preservation implications. For a more detailed look at how these changes will affect you, it may be a good idea to speak with your financial professional today.
