Guide To IRA Products And Their Recent Changes

Q: I’m ready to start saving for my retirement, but the choices are so confusing! I’m also Man sitting at laptop with phonewondering about the recent changes made to Individual Retirement Account (IRA) products through the SECURE and CARES acts. How do I choose the IRA that’s right for me, and what do I need to know?

A: It’s commendable that you’ve started thinking about your retirement planning. There are important distinctions between each type of IRA, so it’s best to review them before making your choice. There have also been several recent changes to the structure and limitations of IRAs with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020.

This comprehensive guide to Individual Retirement Accounts, complete with updated information on the recent changes, can help you choose the option that best suits your needs.

Traditional IRA

Traditional IRAs are the most straightforward retirement accounts. Contributions are never taxed. Depending on eligibility, they may even be tax-deductible while significantly lowering your taxable income. Investment earnings aren’t taxed and there are no income limits for contributors.

The downside of traditional IRAs comes after contributions are made. All withdrawals made from a traditional IRA during retirement will be taxed at the going tax rate at that time.

Traditional IRAs are great for individuals who are currently in a higher tax bracket and anticipate being in a lower one during retirement. They’re also a good choice for employees who do not have access to a workplace-sponsored retirement plan.

Roth IRA

Roth IRAs are similar to their traditional counterparts, but have several notable differences. All contributions and growth are subject to taxes and are not tax-deductible; however, account holders can withdraw their money, tax-free, at retirement, as long as they are age 59 1/2 or older and have had the account for 5 years or longer.

There is also no age limit for contributions, though there are income and contribution limits for eligible contributors.  A Roth IRA is a good choice for individuals who anticipate being in a higher tax bracket during retirement and for those who may need to access some of their savings before retiring.


Simplified Employee Pension (SEP) IRAs are designed for individuals who have been employed in their place of work for at least three of the past five years. Contributions are made by the employer and are subject to a maximum amount. Earnings can grow tax-free and the account provides tax benefits for the employer. The annual contribution limits are higher than the limits for traditional IRAs, but are subject to fluctuation along with the business’s cash flow. Also, there are no catch-up contributions allowed for workers who are 50 years old and over.

A SEP IRA can be a good choice for small business owners wanting to avoid the heavy startup and maintenance costs that are commonly associated with conventional retirement plans.

Up until the passing of the SECURE Act, the limit for SEP IRAs was capped at 25% of an employee’s salary or up to $56,000, whichever is less. Now, that limit has been increased to $57,000.


A SIMPLE IRA, or a Savings Incentive Match Plan for Employees, functions similarly to a SEP IRA with the distinction that both employees and employers can make contributions. Eligibility requirements are forgiving, with employees who have earned at least $5,000 from the company opening the plan, and who expect to earn at least that amount in the current calendar year, being eligible to participate.

The contribution limit for SIMPLE IRAs was $13,000, with a catch-up limit of $3,000 until the passing of the SECURE Act, which increased the limit to $13,500. The legislation also established a new tax credit of up to $500 a year for businesses establishing a SIMPLE IRA with automatic enrollment. This credit is on top of the startup credit that is already available. Employers converting an existing plan to one with Eligible Automatic Contribution Arrangements (EACA) are also eligible for the $500 tax credit.

Spousal IRA

A Spousal IRA can be a traditional or Roth IRA and is designed for married couples where one spouse isn’t eligible for a traditional retirement account. Couples must file a joint tax return to be eligible and the account must be opened in the non-working spouse’s name. Contribution limits are determined by the working spouse’s income.

SECURE Act changes to retirement accounts

The SECURE Act made several significant changes for all IRAs:

RMD changes: IRAs have rules in place for required minimum distributions (RMDs), or a predetermined time when account holders must begin taking distributions. Up until Dec. 20, 2019, all holders of IRAs were no longer allowed to make contributions, and were required to begin taking distributions when they reached age 70 ½, irrespective of their employment status at the time. With the passing of the SECURE Act in December 2019, the age for RMDs increased to 72 years. Also as part of the SECURE Act, IRA holders can now continue making contributions indefinitely, as long as they can demonstrate earned income.

Changes for workplace retirement plans: Previously, employers were allowed to exclude employees who worked fewer than 1,000 hours per year from all retirement plans. With the passing of the SECURE Act, employees who work at least 500 hours in three consecutive years, and are at least age 21 at the end of the three-year period, are eligible to participate in employer retirement plans. This change takes effect in January 2021. Also, small businesses can now team up with other organizations when opening an employer retirement plan, enabling them to provide their employees with access to low-cost plans.

Changes for inherited IRAs: Until the passing of the SECURE Act, non-spousal inheritors of IRAs were allowed to withdraw funds from the account indefinitely. Now, they must empty the account within 10 years.

CARES Act changes to retirement accounts 

In March 2020, Congress passed the CARES Act in an effort to mitigate the economic fallout of the coronavirus pandemic. Part of the 300+ page legislation made changes to retirement accounts:

Changes for RMDs: The CARES Act waived all RMD requirements of IRAs for the year 2020.

Special allowances for coronavirus-related withdrawals: The CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans to qualified individuals who have been adversely affected by COVID-19.

If you are considering opening an IRA, contact Destinations Credit Union.  We have many options for IRAs and give you the opportunity to build your nest egg slowly through regular contributions.

Consult your tax advisor for your individual situation.

Your Turn: Have you made any changes to your retirement accounts in light of the recently passed legislation? Tell us about it in the comments.


What You Need To Know About Inheriting An IRA

No one likes to think about what happens when a family member passes on, but it’s best grandparents with young childto plan for the financial repercussions of a death in the family long before the time comes.

Most people assume an inherited IRA account will work just like any other asset they may inherit from a loved one. However, there are many rules and regulations at play when it comes to inheriting an IRA. The wrong choice can cost the beneficiary a whole lot of money in taxes and penalties. That’s why it’s important to take the time to research your options now. Then, when the time arrives, you will have a plan in place, allowing you to fully focus your attention on the right matters without worrying about financially messing up.

Read on for all you need to know about inheriting an IRA.

Inheriting from a spouse

The surviving spouse has two options when inheriting a traditional IRA:

  1. Spousal rollover:

    The surviving spouse can either change the IRA’s title to have their own name listed as owner, or transfer all the funds to their own existing IRA. If possible, the transfer of funds should be done within 60 days of the departed spouse’s death to avoid heavy taxes on the distribution. Once transferred, the money can continue to grow, tax-deferred.

    This is the most popular option for surviving spouses. However, it is not always the best choice. Surviving spouses cannot access transferred IRA funds without paying the 10% early-withdrawal penalty-in addition to income taxes-until they reach the age of 59 ½. Also, if the surviving spouse is older than 70½, they must take an annual minimum distribution.

  2. Open an inherited IRA

    With this option, the new owner will remain the beneficiary of the original IRA and open a new inherited IRA account in their own name. This allows the surviving spouse to avoid the 10% early-withdrawal penalty even if they are younger than 59½ years old.

    The owner of the inherited IRA must then begin taking distributions from the account before Dec. 31 of the year of their spouse’s death.

There are 3 ways to take distributions from an inherited IRA:

  • Distributed evenly over the rest of the beneficiary’s lifetime. Each withdrawal amount will be based upon the beneficiary’s life expectancy. The surviving spouse also has the option to calculate their life expectancy based on the original owner of the IRA instead of their own. This can be a convenient choice for spouses who were much older than their departed partners, as it allows the surviving spouse to withdraw less money each year and let the remaining amount collect additional interest until they need to access it.
  • Over the course of five years. Emptying the entire IRA in the five years following the original owner’s death will force the beneficiary to pay heavy income taxes on the withdrawals.
  • In one lump sum. The income taxes on a single, full withdrawal of funds can be steep enough to offset any gains.

Non-spousal inheritance

Inheriting an IRA from someone other than a spouse comes with its own set of rules. Primarily, beneficiaries of these IRAs cannot choose to transfer the funds in the inherited IRA into their own accounts. Instead, they will need to begin taking distributions after the IRA’s owner has passed on. They can choose to take distributions over their lifetime, within five years after the deceased’s passing or in one lump sum.

Beneficiaries of non-spousal inherited IRAs cannot make new contributions to the account. Instead, they must begin taking distributions by Dec. 31 of the year following the death of the IRA’s original owner.

The exact amount that will need to be withdrawn annually depends on the inheritor’s age. You can check out the IRS’s Single Life Expectancy Table here to calculate how much you would have to withdraw each month from an inherited IRA at various ages.

Failure to withdraw the Required Minimum Distribution (RMD) can mean getting hit with a 50% penalty on the remaining RMD. For example, if you were required to withdraw $7,000 from an inherited IRA per year, but you only withdrew $2,000 one year, you will need to pay a full 50% penalty on the remaining $5,000. That means that $2,500 will go to Uncle Sam instead of into your Destinations Credit Union account.

Multiple beneficiaries

When there are several beneficiaries for a single IRA account, each beneficiary must open their own inherited IRA account and transfer the funds accordingly. In most cases of multiple beneficiaries, RMDs are calculated according to each beneficiary’s age. However, if the assets aren’t divided before the Dec. 31 deadline, the RMDs will be based upon the age of the oldest beneficiary until the funds are distributed into each of the beneficiaries’ inherited IRAs.

Roth IRAs

Roth IRAs are not tax-deferred like traditional IRAs, so there is never any income tax to pay on withdrawals. There are also no RMDs at play for the original account owner. RMDs will not affect the surviving spouse either, as long as they change the title of the Roth IRA to list their own name as owner.

However, there are RMDs for non-spousal beneficiaries of Roth IRAs. These beneficiaries are required to begin taking distributions from inherited Roth IRAs in any one of the three manners listed above. If the money has been in the Roth IRA for more than five years, the beneficiaries will not be required to pay any taxes on these distributions.

It’s important to weigh your options now so, if you are the beneficiary of an inherited IRA account, you already have a plan in place for the funds.

Your Turn: Which option do you think is smartest for a beneficiary of an inherited IRA? Share your opinion with us in the comments.