Sweeping legislative tax or retirement reforms typically happen every 10 years or so, but December of 2019 brought us the 2nd major piece of congressional action in 2 years!
Just two years ago, we were busy deciphering the TCJA (Tax Cuts and Jobs Act) passed in December 2017.
Congress must have hired a new CAO (Chief Acronym Officer) this year.
This one has a snazzier Acronym – the SECURE Act stands for “Setting Every Community Up for Retirement Enhancement”. It was signed into law in December 2019.
Some of us are scratching our heads on whether this legislation does indeed set EVERY community up for retirement enhancement, but it is easier to say than TCJA.
There is a lot in this legislation and this is certainly not a comprehensive review.
Today I cover six SECURE ACT highlights relevant to individuals.
1. The age for RMDs (Required Minimum Distributions) from traditional IRAs is increased to age 72 instead of 70½.
- If you turn 70½ any time after 12/31/19 you do not have to take an RMD from your IRA until you turn 72.
2. Elimination of the “stretch” provision for non-spouses inheriting an IRA
- Previously, if you inherited an IRA from someone, you could “stretch” the distributions (and the tax) over the remainder of your life expectancy. The SECURE Act changes this – now the inherited IRA account must be emptied (and tax paid) within 10 years. In most cases this will increase income tax paid.
- This goes into effect for IRA owners who pass away after 12/31/19
- Inheriting spouses still have the option of taking payments over their lifetime or making the IRA their own.
- There are exceptions to the 10 year rule for beneficiaries who are disabled, chronically ill, not more than 10 years younger than the decedent, and minor children of the decedent (but not grandchildren). For minor children the 10 year rule still kicks in at the age of majority.
- If you have named the trust as a beneficiary of your IRA – the new rules could create unintended consequences that are beyond the scope of this newsletter. If you have a trust listed as an IRA beneficiary it is time to make an appointment with the Estate Planning attorney who drafted the trust and review your options.
Heather Bartel, Estate Planning attorney with Squillace and Associates says this:
“If you have an existing estate plan, it is important to have an attorney review your documents to ensure your plan continues to support your goals in light of the SECURE Act. An attorney can discuss the impact of the new legislation on your estate plan and retirement accounts, and help you determine whether an update is appropriate based on your individual situation. If you do not review your documents with an attorney, there could be different or unintended consequences than you originally anticipated at the time you created your plan.
If you do not have an estate plan, now is a great time to discuss the various strategies available to help plan for these unique assets with your advisors.”
3. Elimination of the age limit to contribute to a Traditional IRA
- Previously, you were prohibited from making a contribution to a Traditional IRA after age 70½. Under the new bill you can make a contribution to a Traditional IRA at any age as long as you or your spouse have earned income (typically wages or self-employment earnings).
4. Penalty free withdrawals from IRAs for childbirth and adoption
- You are now allowed to take $5,000 penalty free (but you still owe tax) from your IRA or employer plan during a one-year period from date of birth or date of adoption finalization for a new child. Each parent can do this.
5. New “Qualified Education Expenses” for 529 plans
- You can use money from a 529 plan to pay off up to $10,000 of student loans.
- 529 plan money can also be used to pay for Apprenticeship Programs.
6. The SECURE Act received strong support from the insurance industry and here’s why:
- The bill makes it easier for 401k type plans to offer annuities as an investment option. There is no requirement that the plan provider select the lowest cost option. Expensive, complex annuity options may find their way into countless 401k plans. Buyer beware.
This bill potentially effects some people a lot, others not so much.
What to do now?
Check the beneficiary designations of your IRAs and 401k/403b/457 plans.
- I mean really check them, don’t assume you know what they say.
- If there is a trust listed as beneficiary, it is time to make an appointment with the attorney who drafted the trust to discuss how the new law effects your plan.
If you have IRAs, especially if they have large balances, talk to your financial/tax advisor.
- Roth conversions during life may be increasingly popular to avoid the accelerated tax hit on heirs from the new 10 year rule.
- Spending down traditional IRAs during life and leaving Roth IRAs and other non-IRA assets for heirs may also make sense.
This law is complex and every situation has its own individual peculiarities. Don’t hesitate to engage professional help to sort it all out.
