SECURE ACT OF 2020: IRA's, RMD's and Other Changes for Retirement Plans

 News on Retirement Accounts:  In December of 2019, Congress passed the painfully named Setting Every Community Up for Retirement Enhancement Act of 2019, so that they could shorten it to the SECURE Act.  The Act is concerned with the fact that Americans don’t have a lot of significant retirement assets, and are too reliant on Social Security – which was always intended as a supplement for retirement and not the sole retirement income.  So the Act encourages employers to open up simpler plans, extend participation to part-timer workers, and make certain changes regarding IRA’s.  The whole bill would take an upper level tax seminar to fully understand.  I wanted to go through several changes significant to my age group – the folks heading into retirement.  I find it helpful to write about complicated matters to make them easier to understand – for me and for you.

If you keep working, you can keep putting money into your IRA:  Before the Act, once you turned 70 ½, you could no longer make contributions to an IRA.  In fact, you were then required to start withdrawing money each year.  The Act recognizes that people are working longer and living longer – so as long as you are earning income (not passive investment income), then you can continue to contribute to your IRA past the age of 70 ½.  If you work until you are 100, you can keep socking away your annual IRA contribution.  But you still must take the Minimum Required distribution by age 72. 

Required Minimum Distributions Deferred to 72:  Before the Act you were required to begin taking a Minimum Required Distribution (RMD) of your tax-deferred retirement funds at age 70 ½.  The annual amount was calculated based on your life expectancy.  You could always take more – you can take all of the money out of your IRA at any time after age 59 1/5, but after 70 ½, you had to take at least the minimum.  That starting age has now been extended:  you have to begin taking the required minimum by age 72.  And when you take that money out (unless it is a Roth IRA on which you have already paid income tax), then you recognize taxable income that year.  That is why they force you to take the money – because this is untaxed income – you took a deduction for it in the year that you earned it - and they want their tax share in your lifetime. 

Inherited IRA’s & RMD’s.  If you die, what becomes of your IRA and how is it taxed?  Recall that this is untaxed income, and so the Government wants its share, even after you are gone.  Before the Secure Act, the IRA would go to your designated beneficiaries, who could then take all the money and pay the tax that year, or could instead roll the money into an inherited IRA account, and take the Minimum Required Distribution each year based on their life expectancy.  This was called the “Stretch” – because the same money would have been paid over the life of the account owner, but since they died, the payments could now be  s—t—r—e--t—c—h—e--d  over the life expectancy of the new owner – in most cases in the next generation.  And so the government had to wait a much longer time for their cut.  If they shorten that period, then they get their share sooner, and so can in effect pay for some of the other benefits they are giving out.  And so that is exactly what they did in the SECURE Act. 

So now, if you inherit an IRA in 2020 and afterwards, and you are a surviving spouse or minor child or certain other favored categories, the old rules apply, and you have to take your RMD calculated with reference to your life expectancy.  However, for virtually everyone else who inherits an IRA in 2020 and later, you must take the Minimum Required Distribution over the next ten years.  You can take it (and pay taxes) all at once, or in one year but not another, or all in the last year, or whatever else is convenient to you.  If you have a low income year that drops you into a lower tax bracket, you may want to take your withdrawal then.  So there are still opportunities for tax planning, but not the same benefit as before when the well to do could take only the minimum during their lifetime, and then pass along the remaining balance which could then be spread over the lifetimes of their presumably much younger beneficiaries. 

Summary:  There are a host of other changes in the Secure Act.  I sat in a seminar with other tax and estate planning attorneys and as always, the complexity and ambiguity in every extensive new tax law was mind-boggling.  So, if you think you are going to be passing along, or inheriting, an IRA or other retirement plan, the alarm bells should go off and you should make an appointment with your financial advisor to talk about what your options may be.  The downside to not taking a timely RMD?  You will owe the tax on what you should have taken that year, plus you will pay the government 50% of what you were required to take that year, as a penalty. 

CORONAVIRUS LEGISLATION UPDATE (March 27, 2020):  As part of the Government’s massive legislative response to the Coronavirus pandemic in Spring of 2020, the proposed Act waives the requirement for anyone taking an RMD in 2020.  You don’t have to withdraw the minimum in year 2020 – though if your income is severely impacted, you may want to take the minimum or more this year, to pay your bills, or take the payment in a year when you are paying a lower tax rate. 

French lesson of the day: Force Majeure

force ma*jeure\ n [F, superior force] (1883) 1 : superior or irresistible force 2 : an event or effect that cannot be reasonably anticipated or controlled; compare act of god.

The Situation:  As we all huddle at home with our families, not going to work or social events on pain of arrest, and listening to the news reports of more victims and area deaths, are we currently experiencing some kind of superior force that could not be reasonably anticipated or controlled?  

Welcome to the world of “Force Majeure”. 

What is Force Majeure?  Force Majeure is a legal buzzword, used to describe one of a variety of boilerplate clauses that a thorough lawyer puts in every contract that he drafts.  They are the clauses that no one every reads, until there is an act of terrorism or earthquake or war or perhaps a pandemic, and one or both of the parties are having difficulty honoring a particular obligation under their contract.  For example, a landlord is obligated to get the leased space ready for a tenant – but can’t get the carpet delivered, can’t get a contractor to perform the work, isn’t even allowed to work in the work place.  Is the landlord in default under the lease?   It may depend on whether there is a force majeure clause in the lease.  If the clause is there, it will likely say that either party is excused from performing when they cannot do so by reasons of force majeure.  The operation of that clause does not necessarily cancel the whole contract, unless of course the event makes the whole contract unenforceable – such as all of the leases and service contracts in the World Trade Tower buildings.  Or the hotel room contracts in New Orleans during Hurricane Katrina.  In the cases where the event is expected to be more temporary, than the clause can excuse the timeliness of performance until the event that caused the lack of performance has resolved.  In the case of the landlord, once the carpet can be delivered, and the labor force is free to travel and work, then “game on” under the contract.

What if we disagree?  Like all contract clauses, this one is just words on paper – and so if the cause and effect are unclear, in the minds of one party or both, then the situation only resolves itself when the parties agree on how to move forward, or when they take the issue to a judge who then tells them what he thinks.  The second way costs a lot more money than the first way.  In cases like we are experiencing, it is better to work with your other contracting parties, and be the epitome of the law’s “reasonable man”.  Because if a judge must some day decide who was reasonable in the situation, you don’t want to be seen as the party who was hitting the other party over the head with the legal boilerplate in your contract, while your other party was home with their children or aged parents, dealing as best they could with everything else that must be handled in an emergency. 

That clause is not in my contract!  And if you have no “force majeure” clause in your contract?  There are a variety of other legal doctrines that will excuse performance in the hard cases, including  impossibility of performance, commercial impracticability, and frustration of purpose.  I can’t lease you space in a building that does not exist.  I can’t install carpet in space that no longer exists.  I can’t come to your workplace and perform contract obligations when the governor has declared a state of emergency and requires me to quarantine at home.  I can’t host your birthday celebration in my restaurant because I have been ordered to close that night.  The law does not require a party to do the impossible. 

On the other hand, if you can still perform your end of the bargain while at home – such as a lawyer, accountant, engineer, web designer, or anyone that can still perform in front of a screen at home rather than at a fixed location such as an office or retail store or warehouse or in an airplane or on a train, then you cannot simply use the existence of a public emergency to take the time off and ignore your contractual obligations.  The game is still “on” for you.

Conclusions?  If you have legal disputes arising from the current pandemic, you are at some point going to be judged on your behavior, whether in the court of public opinion or by a judge.  If you are seen as trying to take advantage of the situation, using power to benefit yourself at the expense of someone with less power, putting money ahead of people, asking others to take risks in a risky environment, you are unlikely to find a sympathetic ear.  So in your dealings with your contracting parties, do the “right thing”, whether because you live your life that way anyway, or you simply want to avoid the adverse consequences.  They will both get you to the right place.