Retirement accounts and COVID-19
Since Congress created the Individual Retirement Account (IRA) in the 1974 Employee Retirement income Security Act (ERISA), it has constantly tinkered with the law’s provisions to adapt to both economic and wage/salary conditions over the past 46 years. The first IRAs, for example, only allowed $1,500 yearly contributions, and workers could buy mostly bonds or annuities with their contributions. Likewise, the legislation that enacted ROTH IRAs – the Taxpayer Relief Act of 1997 – has changed significantly with the times.
These IRAs, of course, became instantly popular, garnering contributions of $1.4 billion in the very first year. Contributions continued to rise steadily over the years, and as of 2018, nearly one-third of American households owned IRAs (more than 42 million households) with a value of approximately $9 trillion. Of that amount, about $800 billion was held in Roth IRAs and the balance in traditional IRAs. There have been many changes to IRAs over the years, and one impactful change occurred in 2006 with the passage of the Pension Protection Act. This established the Qualified Charitable Distribution (QCD) that enabled an IRA owner to contribute directly to a charity from an IRA without having to pay income tax on the withdrawal. The charitable distribution was limited to $100,000 and required debate and yearly renewal by Congress. Members finally made the provision permanent in 2018.
Another round of sweeping changes has occurred in recent months, first under the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act. Provisions include, among others:
– Required Minimum Distributions (RMDs) are now required to begin in the year the IRA owner becomes 72 (previously it was age 70 1/2).
– IRA owners can continue to contribute to their IRA at any age, as long as they have earned income (previously you couldn’t contribute past age 70 1/2).
– For most inherited IRAs, the stretch provision has been curtailed. Your spouse can still roll the IRA to his/her IRA and take the RMD over his/her lifetime, but inherited IRAs for non-spouses (for the most part) now must be distributed within 10 years (previously it was over the lifetime of the non-spouse beneficiary).
More recently, the Coronvirus Aid, Relief and Economic Security (CARES) Act of March 27 enacted the following changes:
– Required Minimum Distributions (RMDs) from IRAs have temporarily been waived for 2020. As of June 23, the IRS issued Notice 2020-51 which allows you to redeposit to your IRA any withdrawals made after Jan. 1. The rollover back to your IRA must occur before Aug. 31.
– The deadline for making contributions to an IRA, ROTH, or SEP was extended to July 15.
– The 10 percent penalty for an early withdrawal has been waived for 2020, limited to $100,000, if the person (or family) has been infected with COVID-19 or is economically harmed by COVID-19. We recommend you consult with your tax advisor if any of the exceptions are of interest to you.
Due to the ongoing retirement of Baby Boomers, the transfer of IRA wealth from one generation to the next has been made more significant by these two acts of Congress, as many of our clients have amassed great wealth in their IRAs. The major changes in the stretch provisions mean you may need to revisit your estate plan.
Cherry W. Smith is with wealth services for The Sanibel Captiva Trust Company.