Effective January 1, 2020, the SECURE Act (“Setting Every Community Up for Retirement Enhancement Act”) makes some significant changes to how financial institutions handle retirement plans in unclaimed property.
Specifically, there are three major provisions of the SECURE Act which you need to be aware of:
- Required Minimum Distribution Age The RMD age moves from 70 1/2 to 72.
- Inherited IRAs Inherited IRAs must be distributed within 10 years of the owner’s death.
- Maximum Deductible Contributions Age The upper age limit to make deductible contributions is removed.
How These Changes Affect Unclaimed Property
Required Minimum Distribution Age
Typically, dormancy is triggered on individual retirement accounts (IRAs) when the account owner reaches the RMD age plus the requisite inactivity period (usually 3 or 5 years).
For those that reach 70 1/2 after December 31, 2019, the SECURE Act changes the RMD to 72. For those that turned 70 1/2 prior to December 31, 2019, the RMD age remains 70 1/2 and required distributions must continue.
For financial institutions looking to determine whether an account is potentially unclaimed property, this provides an interesting complication.
First, institutions must calculate when the account owner turns 70 1/2 to determine the applicable RMD.
There will then be two buckets of accounts – those that the 70 1/2 RMD age applies to and those accounts that the 72 RMD age applies to. From there, you can then add the state specific dormancy period to determine when an account is unclaimed property.
But hold up, things aren’t that simple.
See, some states have the RMD age written in as 70 1/2 and some states have it drafted in reference to the federal requirements.
If the state statute refers to 70 1/2 specifically, then these statutes will need to be updated. However, state legislatures may not see this as a pressing priority, leaving some ambiguity in the administration of the accounts.
The Revised Uniform Unclaimed Property Act (“RUUPA” – the unclaimed property model act passed in 2016) specifies that the RMD age is 70.5 (see Section 202(a)(2)(A)). States that have passed RUUPA will need to amend this provision to stay consistent with the federal tax rules and avoid some serious and unintended tax consequences for retirement account owners.
Unclaimed property compliance is no easy task, and this added wrinkle to determining dormancy will not help make it any easier.
Beginning in 2020, inherited IRAs must be distributed within 10 years of the owner’s death, unless the designated beneficiary qualifies for an exemption from the shortened distribution provision.
The good news for financial institutions is that the shortened distribution schedule for inherited IRAs may increase activity and leave you with fewer small balance IRAs.
Maximum Deductible Contribution Age
Previously, account owners could not deduct contributions made after they reached 70 1/2.
With the change to continue to allow deductible contributions past the RMD age, financial institutions may continue to see activity in IRAs by older account owners.
This owner-generated activity would prevent dormancy and thus escheatment of the IRA.
What Financial Institutions Need to Do Now
The next step for financial institutions is to determine how the changes made by the SECURE Act affect their accounts and to update applicable dormancy rules.
January 1, 2020, was also the effective date of the new IRS rules requiring financial institutions to withhold tax upon escheating an IRA to state unclaimed property authorities.
This withholding requirement is from Revenue Ruling 2018-17.
The withholding requirement was postponed from January 1, 2019 to January 1, 2020 in Notice N-18-90.
Contact DeCarrera Law to Discuss the SECURE Act
If you need help updating your dormancy matrix and trigger rules or complying with withholding requirements, please contact Kimberly DeCarrera for a consultation.