What the SECURE Act Means for You
On Friday, December 20, the SECURE Act (officially titled the Setting Every Community Up for Retirement Enhancement Act) was signed into law. The SECURE Act contains 29 provisions, encompassing many aspects of financial planning and retirement saving.
SOME KEY PROVISIONS OF THE SECURE ACT:
RAISE AGE FOR REQUIRED MINIMUM DISTRIBUTIONS (RMDs) FROM 70½ TO 72: As a result, retirement savings can last longer into retirement years as the life expectancy of Americans increases.
*Applies to those turning 70 ½ on January 1, 2020 or later
REPEAL IRA CONTRIBUTION AGE: Traditional IRA contributions are no longer prohibited at age 70½. As with Roth IRAs, there is no longer an age threshold for making IRA contributions (as long as an individual has earned income).
MODIFY THE RMD RULES FOR DESIGNATED BENEFICIARY ACCOUNTS: RMDs are now required to be made within ten years of an account owner’s death. Those excepted from this rule include the surviving spouse, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the account owner, or a child of the account owner who has not yet reached the age of majority.
PENALTY-FREE WITHDRAWALS DUE TO BIRTH OR ADOPTION OF A CHILD: Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to proceed with caution.)
EXPAND QUALIFIED TUITION EXPENSES UNDER SECTION 529 OF THE INTERNAL REVENUE CODE: Qualified expenses will include apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and tuition for private elementary, secondary, or religious schools.
ALLOW OPEN MULTIPLE EMPLOYER PLANS (MEPs): Open MEPs permit unrelated small businesses to band together in an open retirement plan arrangement. This enables companies with smaller plans to take advantage of economies of scale and employ features that typically are available only in larger plans.
ALLOW LONG-TERM, PART-TIME EMPLOYEES TO PARTICIPATE IN THE COMPANY RETIREMENT PLAN: Employers are required to offer eligibility to these employees once they complete either one full year of service (with more than 1,000 hours worked) or three consecutive years of service with at least 500 hours worked per year.
REINSTATE LOWER “KIDDIE TAX” RATES: Kiddie Tax rates reinstated to their original, lower rates from prior to the Tax Cuts and Jobs Act of 2017. (Excess income will be taxed at the parents’ rate rather than the trust and estate rates.)
STIPEND AND NONTUITION FELLOWSHIP PAYMENTS: Allow graduate students to count stipends and nontuition fellowship payments as compensation for IRA contribution purposes.
WHO IS NOT AFFECTED BY THE SECURE ACT?
This new legislation will not affect the following individuals:
Those who turned 70½ prior to December 31, 2019 (Individuals who were 70½ or older as of December 31, 2019, will continue with RMDs under the pre-SECURE Act rules.)
Surviving spouses of IRA owners
Beneficiaries of IRA owners who died before December 31, 2019
Beneficiaries of some owners of existing qualified annuities
As the SECURE Act takes effect, take a moment to consider the following planning opportunities in light of the loss of the "stretch" IRA:
ROTH CONVERSIONS: Depending upon your tax bracket, it might be a good time to consider a Roth IRA conversion, so that beneficiaries may avoid being taxed rapidly on distributions. Alternatively, individuals with legacy priorities may not be motivated to accelerate Roth conversions under the SECURE Act because a grandchild, for example, will not receive the long period of tax-free growth from the inherited Roth.
CHARITABLE REMAINDER TRUSTS (CRTS): Consider naming a CRT as the beneficiary of an IRA. A beneficiary would collect a stream of income from the assets of the CRT for a specified time, after which the charity would collect whatever is left. The beneficiary would only be responsible for taxes owed on distributions from the CRT.
LIFE INSURANCE: Individuals may want to explore whether taking a withdrawal from the retirement account to pay premiums on a life insurance policy is more advantageous than leaving the retirement account to the beneficiaries. Beneficiaries typically receive life insurance money tax free. Depending on the insurability of the individual, the total death benefit payable to the beneficiaries may exceed what they receive as beneficiary of an IRA. This analysis should be performed by a qualified financial professional.
QUALIFIED CHARITABLE DISTRIBUTION (QCD): If an individual is older than 70 ½, he or she is entitled to make tax-free gifts of up to $100,000 per year from their IRA payable directly to charity. This may become more advantageous after the SECURE Act because IRAs will become a less attractive inherited asset.
TRUSTS: The SECURE Act decreases the amount of complexity and risk involved in naming a trust as a beneficiary. *Individuals who named a trust as a beneficiary of an IRA prior to the implementation of the SECURE Act should review their current estate plan with an attorney as in some instances, trusts drafted prior to the SECURE Act may be obsolete, resulting in a distribution pattern that works against the original intent of the trust.
ESTATE PLANNING: It may make sense for account owners to review their estate plans and consider distributing IRA assets to minors or individuals in lower tax brackets, while leaving non-retirement assets to those with higher incomes.
SECURE YOUR FUTURE
As more information becomes available regarding the interpretation of the SECURE Act, it’s important to continue to review all aspects of your financial plan and beneficiary elections to ensure that you understand how you and your family have been affected. Be sure to reach out to your tax professional or contact our office for help navigating your situation.