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How Does the SECURE Act Impact You?

Posted: Jordan Nightingale

Back on December 20th, President Trump signed the “Setting Every Community Up for Retirement Enhancement (SECURE) Act” into law, which was part of a larger spending bill to continue funding the government. Many of the key provisions are perceived to be positive and allow for more flexibility, while others will impose some new limitations. Most of the provisions became effective on January 1st.

The new SECURE Act will have the most impact on those who have large tax deferred account balances (primarily IRAs and 401(k)’s) due to the various changes to distribution rules that apply to these accounts. We are currently incorporating these new changes and will be identifying new planning opportunities that may enhance your financial plan.

The following is a summary of the key SECURE Act changes:

First off, required minimum distributions “RMDs” now start at age 72 for those who were born after June 30, 1949. Thus, this delayed RMD start date applies only to those who did not turn age 70.5 before 2020. For those who reached age 70.5 in 2019, you must take your first RMD no later than April 1, 2020.

However, if you are still employed beyond reaching age 70.5, you can delay taking RMDs from your current retirement plan until you retire. This exception applies only to your employer sponsored retirement plan (not IRAs) and if you are less than a 5% owner.

If you were expecting to start IRA distributions this year due to RMDs, we should re-evaluate your withdrawal strategy as you now have additional time to potentially implement some tax planning strategies.

Qualified Charitable Distributions (QCDs), which are charitable contributions made directly from your IRA, are still permitted starting at age 70.5 regardless of when your RMDs must start. Despite not offsetting your RMD amount if you are able to delay to age 72, you could still benefit by giving IRA funds to charity before then as those funds have not been taxed. Additionally, QCDs are a great strategy to reduce your gross income in order to stay under the Medicare surcharge brackets, even more so for those who cannot itemize deductions anymore. The QCD annual limit is $100,000.

RMD tables are being updated this year for everyone to adjust for slightly longer life expectancies. These new RMD tables are expected to take effect next year. This should result in slightly lower RMD amounts for everyone starting in 2021.

Starting in 2020, the age limit for deductible IRA contributions (formally age 70.5) is eliminated. Those who have earned income can now make deductible IRA contributions (subject to income limitations to determine deductibility). Spousal IRA contributions are also permitted as well. Please note the 2020 IRA contribution limit is $6,000 ($7,000 for those age 50 and older).

“Stretch IRAs” are going away. Prior to 2020, a non-spouse inheriting an IRA could take RMDs over their remaining life span. Now if you inherit an IRA from a non-spouse, you only have a 10-year period (but no RMDs) to pay tax on those funds. This eliminates what was known before as “Stretch IRAs” by limiting the distribution period to 10 years. Eligible Designated Beneficiaries (EDBs) are exempt from the 10-year rule.

EDBs are:

  • Surviving spouses
  • Disabled persons
  • Chronically ill persons
  • A beneficiary NOT more than 10 years younger than the decedent
  • The decedent’s MINOR child

This could have big implications for those non-EDBs who inherit large IRAs. For instance, if you are age 55 when inheriting a large IRA, you could be in your peak earning years, thus, adding more to your taxable income when you least need it. However, the new rule allows you to let your new Inherited IRA continue to grow tax deferred without any RMDs before the 10th year. Thus, you were going to retire during that period, you could wait to distribute your Inherited IRA funds until you are retired (and likely in a lower tax bracket).

On the flip side, if you are well into your retirement and are likely to pass on large IRA balances, it might be prudent to reconsider your portfolio withdrawal strategy now, along with reconsidering who your named beneficiaries are, given the new 10-year rule.

The SECURE Act also impacted qualified retirement plans as well. Part-time workers can now participate in retirement plans, such as 401(k) plans. Previously, those who worked less than 1,000 hours annually could not participate in employer sponsored retirement plans. Additionally, small businesses now have more flexibility and incentives to offer retirement plans via open multiple employer plans (MEPs) and up to a $5,000 tax credit for establishing a new retirement plan.

However, it is now easier for employers to offer “guaranteed lifetime income plans” a/k/a annuities within retirement plan via expanded safe harbor provisions. Thus, it is highly likely that annuity options will start appearing inside retirement plans soon. For most folks, we do not recommend annuities, especially given our current interest rate environment.

The SECURE Act also provides more flexibility for utilizing 529 Education Savings Plans. Up to $10,000 (lifetime limit) can now be used to repay the beneficiary’s student loans and for each of their siblings. This provides more options for those who did not use all their 529 funds while in college. Additionally, 529 funds can now be used to pay for apprenticeships as well.

Furthermore, each parent can now take up to $5,000 from their IRA within one year after each childbirth or adoption without incurring a 10% early withdrawal penalty if under age 59.5. However, income tax would still be due on this withdrawal.

As illustrated, the SECURE Act is rather broad in nature and will likely have some impact on your financial plan. As your trusted advisor, we will determine how this new law will personally impact you and will adjust your plan accordingly.

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