Big Changes to Retirement Planning with the SECURE Act

January 7, 2020

With the busy-ness of the holidays, you might not be aware of recent legislation that just passed both chambers of Congress and was signed into law by the President last month.  The “Setting Every Community Up for Retirement Enhancement (SECURE)” Act was part of the annual US spending bill to keep the country funded for the next fiscal year to September.

The SECURE Act contains provisions that could affect retirement and tax planning for many people.   Here are some details about major provisions;

  1. For non-spouse beneficiaries of IRA’s whose owners pass away after January 1, 2020, the ability to “stretch” required minimum distributions (RMD’s) within an inherited IRA, over the life of the beneficiary recipient, will no longer be an option. (In other words, no more Stretch IRA’s.) Instead, the beneficiary will be required to completely empty the inherited IRA within 10 years after the original owner’s death.  There appear to be no specific distribution requirements within the 10-year window, only that by the end of that window, all assets in the account must be distributed.  Therefore, a beneficiary can take one lump-sum now/soon/years later, or periodic distributions, etc. 

    Note however, that the new rule does NOT apply to beneficiaries currently taking inherited RMD’s before 01/01/2020: those currently taking required distributions are grandfathered under the prior inherited RMD law.  This change could have income tax implications. Discussing strategic distributions of inherited IRA’s under this new law could be a beneficial idea.  Finally, there are qualified exceptions to this new provision; the new law does not apply (but the old rules still do apply) to beneficiaries who are:

    1. Spouses of the original owners
    2. Disabled
    3. Chronically ill
    4. Less than 10 years younger than the decedent
    5. Minor children of the decedent, but ONLY until the minor reaches age of majority, (then the 10-year window starts).
       
  2. For those who turn 70 ½ AFTER January 1, 2020, their first RMD’s are postponed until age 72.  Thereafter, the same rules apply regarding distributions the first time (can defer until April 1 of the following year, then 12/31 for the second year and thereafter), as well as the annual RMD divisor calculation based upon age.  Therefore, under this new rule, the first RMD calculation will be based upon the prior-year-end aggregate IRS value(s) and the divisor at age 72.   

  3. The SECURE Act allows an individual to withdraw up to $5000 penalty-free from their IRA within one year after either the birth of their child or date of adoption of a child.  This applies to either/both parent(s) and is allowed “per child”.  For Traditional IRA’s, applicable taxes would still apply to the distribution.  This provision was established as a “financial assistance” idea in the Act to help new parents with added expenses of childbirth.
     
  4. The Act eliminates the rule that prevents IRA owners from contributing to a Traditional IRA after age 70 ½.  Now anyone with earned income of any age can make a tax-deductible contribution to a Traditional IRA (good for those over 70 ½ who still work P/T).
     
  5. The Act allows for annuity options within qualified Employer-Sponsored Retirement Plans (such as 401k plans).   There is also a “portability” provision for annuities within a 401k plan if that plan discontinues the annuity feature.The Act also contains changes regarding who provides fiduciary oversight of annuities within employer-sponsored retirement plans.

  6. There are also many new provisions and incentives for small employer retirement plans, including larger tax credits for establishing plans (including SEP’s/SIMPLEs), including 401k plan auto-enrollment, higher auto-enrollment employee contribution limits and allowances for part-time workers to also enroll. 
     
  7. 529 plans – the Act will allow 529 college savings account owners to take qualified distributions for “qualified education loan repayments” up to $10K lifetime cap for the beneficiary of the 529 account.  This limit is per person, so it’s possible an account owner (parent) may use the same account to help more than one of their children pay back student loans, (up to $10,000 per student).  Apprenticeship programs are now also qualified expenses.

  8. Kiddie Tax is back!  The SECURE Act (Section 501) reverses the two-year-old rule (from December 2017) that made unearned income of a child taxable at Trust rates, rather than parents’ marginal rates.  To further complicate things, taxpayers have the option of using either rule for tax year 2019 and 2018.  For those who have children with significant unearned income, consulting with your tax advisor regarding the “kiddie tax” would be wise tax-planning.

If you have questions regarding how this new legislation may affect your financial plan or future objectives, give our office a call – we’d be glad to help.